Chapter 4, Problem 4.4E

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.

	Car	Truck
Estimated wheels produced	40,000	10,000
Direct labor hours per wheel	1	3

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.

Activity Cost Pools	Expected Use of Cost Drivers	Estimated Overhead Costs
Setting up machines	1,000 setups	$220,000
Assembling	70,000 labor hours	280,000
Inspection	1,200 inspections	270,000

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.

Expected Use of Cost Drivers per Product
	Car	Truck
Number of setups	200	800
Direct labor hours	40,000	30,000
Number of inspections	100	1,100

(d) What do you believe Hermann should do?