Question

Swifty 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 $742,000.

Calculate overhead rate. (Round answer to 2 decimal places, e.g. 12.25.)

Overhead rate

$ __________

per direct labor hour

Compute the overhead cost assigned to the car wheels and truck wheels, assuming that direct labor hours is used to allocate overhead costs.

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.

Activity Cost Pools		Estimated Use of Cost Drivers			Estimated Overhead Costs
Setting up machines		1,000	setups		$210,000
Assembling		70,000	labor hours		280,000
Inspection		1,200	inspections		252,000

  

Compute the activity-based overhead rates for these three cost pools.

		Overhead Rates
Setting up machines		$
Assembling		$
Inspection		$

  

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.

Estimated 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

		Car Wheels		Truck Wheels
Setting up machines		$		$
Assembling		$		$
Inspection		$		$
Total cost assigned		$		$

  

Answer 1

Solution :

(1) Calulation of Overhead Rate based on Direct Labor Hours :

Particulars	Car	Truck
Estimated Wheels Production	40,000	10,000
Direct Labor Hour Per Unit	1	3
Total Direct Labor Hours	40,000	30,000

Total Overhead = $ 742,000

Total Direct Labor Hours = 70,000

Overhead Rate = $ 742,000 / 70,000

= $ 10.60 per Direct Labor Hour

(2) Allocation of Overhear based on Direct Labor Hour Rate :

Particulars	Car	Truck
Estimated Wheels Production	40,000	10,000
Direct Labou Hour Per Unit	1	3
Total Direct Labor Hours	40,000	30,000
OverHead Rate	$ 10.60	$ 10.60
Allocated Overhead	$ 424,000	$ 318,000

(3) Activity Based Overhead Rate :

Activity	Cost Driver	Total Overhead	OH Cost
Setting Up Machine	1000 Set Ups	$ 210,000	$ 210 Per Setup
Assembling	70,000 Labor Hours	$ 280,000	$ 4 Per Labor Hour
Inspection	1,200 Inspection	$ 252,000	$ 210 Per Inspection

(4) Allocation of cost based on Activity based overhead rate :

Activity	Car	Truck
Setting Up	200 * 210 = $ 42,000	800 * 210 = $ 168,000
Assembling	40,000 * 4 = $ 160,000	30,000 * 4 = $ 120,000
Inspection	100 * 210 = $ 21,000	1100 * 210 = $ 231,000
Total Cost	$ 223,000	$ 519,000

(5) Comarison of Overhead Cost :

Particulars	Car	Truck
Overhead in Traditional Costing	$ 424,000	$ 318,000
ABC Costing	$ 223,000	$ 519,000

In traditional costing, overhead allocate to truck is lower than overhead alloacted to car while in ABC Costing overhead allocated to trucks are hiigher than overhead allocated to car. Hermann shall use ABC costing as it is based on the actual activity performed on each product and more tracelable.