Question

HRE Wheels Inc. manufactures two products: standard wheels and carbon fiber wheels. To determine the amount of overhead to assign to each product line, the controller has developed the following information.

Assign overhead using traditional costing and ABC.

Standard Carbon Fiber

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

Compute the overhead cost assigned to the standard wheels and carbon fiber wheels, assuming that direct labor hours is used to assign overhead costs.
The controller is not satisfied with the traditional method of allocating overhead because he believes that most of the overhead costs relate to the carbon fiber 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

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

Activity cost pool Amount Use cost driver ABC OH Rate

Setting up machine $220,000 1,000 $220.00

Assembling $280,000 70,000 $4.00

Inspection $270,000 1,200 $225.00

Compute the cost that is assigned to the standard wheels and carbon fiber wheels product lines using an activity-based costing system, given the following information.
Estimated Use of Cost Drivers per Product

Standard Carbon Fiber

Number of setups 200 800

Direct labor hours 40,000 30,000

Number of inspections 100 1,100

Answer 1

Compute the overhead cost assigned to the standard wheels and carbon fiber wheels, assuming that direct labor hours is used to assign overhead costs.

Direct labor hours of Standard wheels= 40000*1= 40000

Direct labor hours of Carbon fiber wheels= 10000*3= 30000

Total direct labor hours= 40000+30000= 70000

Overhead rate= Total estimated overhead costs/Total direct labor hours

= $770000/70000= $11 per DLH

	Standard wheels	Carbon fiber wheels
Overhead cost	(40000*$11)= $440000	(30000*$11)= $330000

Compute the cost that is assigned to the standard wheels and carbon fiber wheels product lines using an activity-based costing system, given the following information.

	Standard wheels	Carbon fiber wheels
Setting up machine	(200*$220)= $44000	(800*$220)= $176000
Assembling	(40000*$4)= 160000	(30000*$4)= 120000
Inspection	(100*$225)= 22500	(1100*$225)= 247500
Total overhead cost	$226500	$543500

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