Altex Inc. manufactures two products: car wheels and truck wheels. To determine the amount of overhead...

Transcribed Image Text:

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. 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 Estimated 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 You are given the following information. 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 Total cost assigned using activity-based (d) What do you believe Hermann should do? BIUT T Car Wheels Truck Wheels $226,500 $543,500 III E = H = # = [ Oword(s) Air United, Inc. manufactures two products: missile range instruments and space pressure gauges. During April, 50 range instruments and 300 pressure gauges were produced, and overhead costs of $94,500 were estimated. An analysis of estimated overhead costs reveals the following activities. Activities Cost Drivers Total Cost 1. Materials handling Number of requisitions $40,000 2. Machine setups Number of setups 21,500 3. Quality inspections Number of inspections 33,000 $94,500 The cost driver volume for each product was as follows. Cost Drivers Instruments Gauges Total Number of requisitions 400 600 1,000 Number of setups 200 300 500 Number of inspections 200 400 600 (c) Write a memorandum to the president of Air United explaining the benefits of activity-based costing. BIU T L | E 99 Oword(s) (d) Number of components 16,000 Number of square feet occupied 8,000 Traditional costing Predetermined overhead rate $8.68 per machine hour Activity Overhead Rate Purchasing $125.00 per order Handling materials $10.25 per move Production Setting up machines Inspecting $2.10 per D/L hour $84.00 per setup $15.00 per inspection Inventory control $0.75 per component Utilities $2.00 per sq. ft. Traditional costing Total cost per stairway = ($284,950 +250) = $1,139.80 ABC Cost per stairway = ($341,460 +250) = $1,365.84 Which of the two costing systems is preferable in pricing decisions and why? BIUT L | = = 3 # Oword(s) 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. 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 Estimated 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 You are given the following information. 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 Total cost assigned using activity-based (d) What do you believe Hermann should do? BIUT T Car Wheels Truck Wheels $226,500 $543,500 III E = H = # = [ Oword(s) Air United, Inc. manufactures two products: missile range instruments and space pressure gauges. During April, 50 range instruments and 300 pressure gauges were produced, and overhead costs of $94,500 were estimated. An analysis of estimated overhead costs reveals the following activities. Activities Cost Drivers Total Cost 1. Materials handling Number of requisitions $40,000 2. Machine setups Number of setups 21,500 3. Quality inspections Number of inspections 33,000 $94,500 The cost driver volume for each product was as follows. Cost Drivers Instruments Gauges Total Number of requisitions 400 600 1,000 Number of setups 200 300 500 Number of inspections 200 400 600 (c) Write a memorandum to the president of Air United explaining the benefits of activity-based costing. BIU T L | E 99 Oword(s) (d) Number of components 16,000 Number of square feet occupied 8,000 Traditional costing Predetermined overhead rate $8.68 per machine hour Activity Overhead Rate Purchasing $125.00 per order Handling materials $10.25 per move Production Setting up machines Inspecting $2.10 per D/L hour $84.00 per setup $15.00 per inspection Inventory control $0.75 per component Utilities $2.00 per sq. ft. Traditional costing Total cost per stairway = ($284,950 +250) = $1,139.80 ABC Cost per stairway = ($341,460 +250) = $1,365.84 Which of the two costing systems is preferable in pricing decisions and why? BIUT L | = = 3 # Oword(s)