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 wheel product line because of its complexity. He therefore develops the following three activity cost pools and related cost drivers to better understand these 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 shoulddo?

Transcribed Image Text:

Truck 10,000 Car Estimated wheels produced Direct labor hours per wheel 40,000 Expected Use of Cost Drivers Activity Cost Pools Setting up machines Assembling Inspection Estimated Overhead Costs $220,000 280,000 270,000 ,00 setups 70,000 labor hours 1,200 inspections Expected Use of Cost Drivers per Product Car Number of setups Direct labor hours Number of inspections Truck 800 40,000 30,000 100 1,100 200