Question

Bonita 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		36,000		11,000
Direct labor hours per wheel		1		3

Total estimated overhead costs for the two product lines are $800,400.

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

Overhead rate

$

per direct labor hour

  

B) 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		$

C) 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		$207,000
Assembling		69,000	labor hours		345,000
Inspection		1,200	inspections		248,400

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

		Overhead Rates
Setting up machines		$
Assembling		$
Inspection		$

  

  

E) 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		36,000		33,000
Number of inspections		100		1,100

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

Answer 1

A)	Overhead Rate		=	Total estimated OH / Total Direct Labor Hours
			=	$ 800400 / 69000
			=	$   11.60

Workings:

Total Direct Labor Hours:
Car	(36000 x 1)	36000
Truck	(11000 x 3)	33000
		69000

B)	OH Assigned to:
	Car	(36000 x $ 11.60)		$ 4,17,600.00
	Truck	(33000 x $ 11.60)		$ 3,82,800.00

D)	OH Rates
	Setting up machines		$ 207.00	($ 207000 / 1000)
	Assembling		$      5.00	($ 345000 / 69000)
	Inspection		$ 207.00	($ 248400 / 1200)

E)	OH Assigned
			Car		Truck
	Setting up machines		$    41,400.00	(200 x $ 207)	$ 1,65,600.00	(800 x $ 207)
	Assembling		$ 1,80,000.00	(36000 x $ 5)	$ 1,65,000.00	(33000 x $ 5)
	Inspection		$    20,700.00	(100 x $ 207)	$ 2,27,700.00	(1100 x $ 207)
			$ 2,42,100.00		$ 5,58,300.00