Altex inc. manufactures two products: car wheels and truck wheels.

E4-4 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.

 

Car

Truck

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

a. Compute the overhead cost assigned to the car and truck wheels, assuming that direct labor hours is used to allocate overhead costs.

b 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.
(c) Compute the cost that is assigned to the car wheels and truck product lines using an activity-based costing system, given the following information.
d What do you believe Hermann should do? (Enter your text answer in the block below.)

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