Question

E Alte in manufactures two products: car wheels and truck wheels. To determine the amount of overhead to sign to each product line, the controller, Robert Hermann, has developed the following information Car Truck red whes produced 40.000 10.000 Direct bor hours per wheel Overhead con www.edhew s 40,000 and truckwh 330,000. T h e cows for the product lines are $70,000 Hermann is not satisfied with the traditional method of locating overhead because he believes that most of the overhead cos relate to the truck wheels product line because complexity. He therefore develop the following three activity cost pool and related costrvers to better understand these cos Estimated Overhead Activity Cost Pools Setting up machines Assebling Estimated Use of Cost Drivers 1,000 setups 70,000 labor hours 1,200 spections $220.000 You are given the following information Estimated use of Centrare per Prede Number of stos 30.000 Number of Car Wheels Truck Wheels (d)

Answer 1

	Total overhead cost incurred	$770,000
	Total direct labor hours	70,000
	Predetermined overhead rate	$11	(770,000/70,000)
		Car wheels	Truck Wheels
	Total cost assigned using activity based	$226,500	$543,500
	Total cost assigned using traditional method	$440,000	$330,000
(d)	Hence, company should adopt the ABC system of the allocation of the overheads.
	As it is clear that in case of Car wheels cost as per ABC was 226,500 However, cost as per traditional
	method was $440,000. This causes wrong quatation of prices to outside party and company would not get the quotations/deals.
	In case of truck wheel, cost as per ABC is 5,43,500 Howeever as per tranditoinal it is 330,000. this may lead to business to losses.