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Topics: Costs, Variable cost, Activity-based costing Pages: 10 (3211 words) Published: April 12, 2015
1-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. Total estimated oh cost for the two product lines are 770,000.

Car Truck SOL FOR A) DL.hours for car wheels=40,000*1=40,000 Estimated wheels produced 40,000 30,000 dl hours for t. wheels= 10,000*3=30,000 ( 70,000 tot.dl hours.) DL Hour per wheels13770,000/70,000=11$per dl hours.

Oh assigned= for car w. 40,000*11=440,000 truck: 30,000*11=330,000
Total OH= 770,000(440,000+330,000)
Questions: a) Compute the OH cost assigned to the car wheels and truck wheels, assuming that dl hours is used to allocate oh costs. d) Hermann isn’t satisfied with the trad. Meth. Of allocating OH coz he believes that most of the OH costs relate to truck wheel product line cos of its complexity. He develops the following three activity cost pools and related cost drivers to better understand these costs. Solution B

220,000/1000=220$ ABC OH RATE
280,000/70,000=5$ ABC OH RATE
270,000/1200=225$ ABC OH RATE
Compute the activity based OH rates for these three cost pools. c)compute the cost that is assigned to the car wheels and truck wheels pro. lines using an activity based costing system,given following info Expected use of cost drivers per product:

Solution c)

200*220=44,000 cost assigned
40,000*4= 160,000
100*225= 22,500 total cost assigned is 226,500
2) the lady sells window covers to both comm. and residential customers.following info relates to its budgeted operations for the current year. Commercial Residential
Revenues 300,000480,000
DM costs 30,00050,000
DL costs 100,000300,000
OH Costs 85,000215,000150,000500,000
Operating income( loss) 85,000(20,000)
The controller is concered about the res. Residential pro. Line. She cont understand wht this line isn’t more profitable given that the insallations of window coverings are less complex for residential customers. She decided to take a closer look at the OH assigned to the two pro.lines to determine whether a more accurate pro. Costing model can be developed. Here are the 3 activity cost pools and related info she developed.

Expected use of cost drivers per product

commericial
residential
Scheduling and travel
1000
500
Set up time
450
250

Questions: a)Compute the activity based OH rates for each of the 3 cost pools, and the determine the OH cost assigned the each product line. b)Compute the operating income for each pro.line, using the activity based OH rates. c) What do you believe they should do?

SOLUTION A)
Commercial
Act. Cos.pools
Expctd use of cost drivers per pro.
*ABC OH rates
= Cost assign
Sc. and tr.
1000
70
70,000
Setup time
450
100
45,000
supervision
100,000
.15
15,000
Tot. assind cost
Same cal. For res
indts
130,000
b)

Commercial

Residential
Revenues

$300,000

$480,000
Direct material costs
$ 30,000

$ 50,000

Direct labor costs
100,000

300,000

Overhead costs
130,000
260,000
105,000
455,000
Operating income (loss)

$ 40,000

$ 25,000
c) Assuming that the cost drivers are a reasonable representation of what is occurring in the two product lines, it seems appropriate to switch to activity-based costing. By using this system, more accurate cost information is developed which should lead to better allocations of resources and more informative pricing decisions in the future. 3) Major Instrument, Inc. manufactures two products: missile range instruments and space pressure gauges.During April, 50 range instruments and 300 pressure gauges were produced, and overhead costs of $94,500 were estimated. An analysis of estimated...
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