Alonzo Inc manufactures two products car wheels and truck wh

Alonzo Inc. manufactures two products: car wheels and truck wheels. To determine the amount of overhead to assign to each product line, the controller, YuYu Ortega, has developed the following information: Car Truck 47,000 14,000 Estimated wheels produced Direct labour hours per wheel Total estimated overhead costs for the two product lines are 1,030,000 Calculate the overhead cost assigned to the car wheels and truck wheels, assuming that direct labour hours is used to allocate overhead costs. (Round answers to O decimal places, e.g. 1,525.) Car wheels Truck wheels Total overhead YuYu 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: Estimated Overhead Costs $318,000 370,000 342,000 Expected Use of Cost Drivers Activity Cost Pools Setting up machines Assembling Inspection 600 set-ups 37,000 labour hours 684 inspection Calculate the activity-based overhead rates for these three cost pools. (Round answers to 0 decimal places, e.g. 1,520.) Cost Pool Setting up machines d Assembling Inspection Rate per set-up per labour hrs per inspection Calculate the cost that is assigned to the car and truck product lines using an activity-based costing system, given the following information: (Round answers to 0 decimal places, e.g. 1,525.) Use of Cost Drivers per Product Number of set-ups Direct labour hours Number of inspections Car 140 21,000 Truck 460 16,000 619 Car ruc Overhead assigned

Solution

Answer 1 - Traditional method of allocating overheads Overhead allocation rate based on direct labour hours = Estimated Overhead cost / Total direct labour hours Car Truck Total Estimated wheels produced 47000 14000 x Direct labour hours per wheel 2 8 Direct Labour hours required 94000 112000 206000 Overhead allocation rate based on direct labour hours = $1030000 / 206000 hours = $5 per direct labour hour Allocation of overhead cost Car Wheels (94000 hours * $5) $470,000.00 Truck wheels (112000 hours * $5) $560,000.00 Total Overheads $1,030,000.00 Answer 1 - Activity Based costing method of allocating overheads Calculation of activity based overhead rates Cost pool Rate Setting up machine ($318000 / 600 setups) $530.00 per setup Assembling ($370000 / 37000 labour hours) $10.00 per labour hour Inspection ($342000 / 684 inspections) $500.00 per inspection Allocation of overhead cost Car Truck Setting Up machine $74,200.00 $243,800.00 Assembling $210,000.00 $160,000.00 Inspection $32,500.00 $309,500.00 Overhead assigned $316,700.00 $713,300.00