Altex 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.
Estimated wheels produced 43,330 15,000
Direct labor hours per wheel 1 3
Total estimated overhead costs for the two product lines are $758,190.
Overhead rate $ 8.58 per direct labor hour
The overhead cost assigned to the car wheels and truck wheels, assuming that direct labor hours is used to allocate overhead costs.
Car wheels $ 371,771.40
Truck wheels $ 386,100
Hermann 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.
Activity Cost Pools Expected Use of
Setting up machines 1,000 setups $222,000
Assembling 88,330 labor hours 264,990
Inspection 1,200 inspections 271,200
Compute the activity-based overhead rates for these three cost pools.
Setting up machines $
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