Question 1 Altex Inc. manufactures two products: car wheels and truck wheels. To

Question

Question 1 Altex Inc. manufactures two products: car wheels and truck wheels. To determine the amount of overhead to assign to each product lin the controller, Robert Hermann, has developed the following information. Car Truck Estimated wheels produced 42,500 12,000 Direct labor hours per wheel Total estimated overhead costs for the two product lines are $803,000 Calculate overhead rate. (Round answer to 2 decimal places, e.g. 12.25 Overhead rate per direct lab hour Compute the overhead cost assigned to the car wheels and truck wheels, assuming that direct labor hours is used to allocate overhead costs. (Round answers to O decimal places, e.g.1,575.) Car wheels Truck wheels 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 Activity Cost Pools Setting up machines Assembling Inspection $225,000 306,000 272,000 1,000 setups 78,500 labor hours 1,200 inspections Compute the activity-based overhead rates for these three cost pools. (Round answers to 2 decimal places, e.g. 12.25.)

Explanation / Answer

Answer: Requirement 1 Overhead rate per direct labour hour Car Truck Total Estimated wheel produced                            42,500                            12,000 Direct labour hours per wheel                                       1                                       3 Total direct labour hours                            42,500                            36,000                  78,500 (42500*1) (12000*3) Overhead cost $               803,000.00 Total direct labour hours                            78,500 Cost per hour $                          10.23 (803,000/78,500) Overhead rate $                          10.23 Per direct labour hour Requirement 2 Overhead cost assigned to Car, Truck Car Wheels $                     434,745 (42,500*$10.23) Truck wheels $                     368,255 (36,000*$10.23) Requirement 3 Computation of the overhead rate using activity based costing approach Overhead Total cost Number of activity Cost per activity Setting up machine $                     225,000 1000 $              225.00 (225,000/1,000) Assembling $                     306,000 78500 $                   3.90 (306,000/78,500) Inspection $                     272,000 1200 $              226.67 (272,000/1,200) $                     803,000 Overhead rates Setting up machine $                        225.00 Assembling $                            3.90 Inspection $                        226.67 Requirement 4 Expected use of cost driver per product Car Truck Number of setups 200 800 Direct labour hours 42500 36000 Number of insections 100 1100 Cost assigned to each product Car Truck Setting up machine $                        45,000 (200*225) $            180,000 (800*225) Assembling $                     165,669 (42500*3.90) $            140,331 (36000*3.90) Inspection $                        22,667 (100*226.67) $            249,333 (1100*226.67) Total cost assigned $                     233,335 $            569,665

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