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

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.
2. 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

1. 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

Traditional Costing

Overhead rate = $770000 / 70000 = $11 per DLH

Overhead cost assigned
Standard = 40000 x 1 x $11 = $440000
Carbon Fiber = 10000 x 3 x $11 = $330000

ABC

	Standard	Carbon Fiber
Overhead
Setting up Machines	$         44,000	$      176,000
Assembling	$      160,000	$      120,000
Inspection	$         22,500	$      247,500
Total Overhead Assigned	$      226,500	$      543,500