Altex Inc. manufactures two products: car wheels and truck wheels. To determine

Question

Altex Inc. manufactures two products: car wheels and truck wheels. To determine the amount of overhead to assign to each product line, the controller, Robert Hermann, has developed the following information.

Total estimated overhead costs for the two product lines are $770,000.

Instructions

(a)  

Compute the overhead cost assigned to the car wheels and truck wheels, assuming that direct labor hours is used to allocate overhead costs.

(b)  Hermann is not satisfied with the traditional method of allocating overhead because he believes that most of the overhead costs relate to the truck wheels product line because of its complexity. He therefore develops the following three activity cost pools and related cost drivers to better understand these costs.

Expected Use of

Cost Drivers

Estimated Overhead

Costs

Compute the activity-based overhead rates for these three cost pools.(c)  Compute the cost that is assigned to the car wheels and truck wheels product lines using an activity-based costing system, given the following information.

(d)  

What do you believe Hermann should do?

Explanation / Answer

a) : Caluclation of Overheads on the Basis of Direct Labour Hrs Given: Total Overheads =      770,000 Direct Labour Hrs = Car        40,000 Trick        30,000 Total Hrs        70,000 Overhead per Labour Hr    = Total Overhead/Total Hrs = 770000/70000 = 11 b) : Caluclation of Overheads to be allocated per Activity Cost Pools: Setting up machines = 220000/1000 Cost Per Setup 220 Assembling Cost = 280000/70000 Cost per Labour Hr = 4 Inspection Cost = 270000/1200 Cost per Inspection = 225 c) : Caluclation of Costs to be assgined based on Activity Based Costing: Activity Exp Usage Cost as per Answer b) Allocated Overhead Car Truck Car Truck Setup Cost            200             800               220        44,000 176000 Direct Labour Cost       40,000        30,000                   4      160,000 120000 Inspection Cost            100          1,100               225        22,500 247500 Total Overheads Allocated      226,500 543,500 d) : Answer Activity-based costing is more accurate because it takes important factors into account before assigning a cost to a product. However, for this same reason, it is a bit more complicated and time-consuming. It's also more thorough and considers nonmanufacturing expenses as well, such as administrative and managerial costs. Traditional costing is a much easier way of determining the cost of a product, since it relies solely on assigning average overhead rates. This also means it won’t always be as accurate, because it doesn’t factor in nonmanufacturing expenses or determine which overhead costs actually affect specific products. So Activity Based Costing is preffered for Hermann for Better & Fair Presentation or Allocation of Overheads on Accurate Basis

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