; Exercise E4-4
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# Exercise E4-4

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```									               Name:                                                                              Date:
Instructor:                                                                          Course:
Managerial Accounting, 3rd Edition, by Weygandt, Kieso, and Kimmel
Solving Managerial Accounting Problems Using Microsoft Excel for Windows by Rex A Schildhouse
Exercise E4-4, Alonzo Inc. manufactures two products: car and truck wheels. To determine the amount of overhead to assign each product line,
the controller, YuYu Ortega, has developed the following information.
Car        Truck
Estimated wheels                    40,000     10,000
Direct labor hours per                   1           3
Total estimated overhead costs for the two product lines are          \$700,000

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

Label                                                            Formula/Value
Label                                                            Formula/Value
Label                                                            Formula/Value

Label                                        Formula/Value
Formula/Value      Label
Label                                        Formula/Value

Label                                       Formula/Value
Label                                       Formula/Value
Formula/Val
Label                                                  ue

(b) Ortega is not satisfied with the traditional method of allocating overhead because he believes that most of the overhead costs related 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 Pool         Estimated Overhead           Expected Use of Cost Drivers            ABC Overhead Rate
Setting up machines              1,000 setups                               \$180,000.00                   Formula/Value
Assembling                      70,000 labor hours                          \$280,000.00                   Formula/Value
Inspection                       1,200 inspections                          \$240,000.00                   Formula/Value
Compute the activity-based overhead rates for these three cost pools.

(c) Compute the cost that is assigned to the car and truck product lines using an activity-based cost system, given the following information.

Setting up machines              1,000 setups                                   \$180,000.00                Formula/Value
Assembling                      70,000 labor hours                              \$280,000.00                Formula/Value
Inspection                       1,200 inspections                              \$240,000.00                Formula/Value

Car Wheels
Expected Use of Cost            Activity Based Overhead
Activity Cost Pool          Driver per Product                       Rates                       Cost Assigned
Setting up machines                   200                           Formula/Value                        Formula/Value
Assembling                           40,000                         Formula/Value                        Formula/Value
Inspection                            100                           Formula/Value                        Formula/Value
Total cost               Formula/Value

Truck Wheels
Expected Use of Cost            Activity Based Overhead
Activity Cost Pool          Driver per Product                       Rates                       Cost Assigned
Setting up machines                    800                          Formula/Value                        Formula/Value
Assembling                           30,000                         Formula/Value                        Formula/Value
Inspection                            1,100                         Formula/Value                        Formula/Value
Total cost               Formula/Value

(d) What do you believe Ortega should do? (Enter your text answer in the block below.)

FileName: a28ae2dc-c811-4dc5-b57b-e9957b87cfb1.xls, Tab: Exercise E4-4, Page 1 of 3, 11/5/2011, 11:35 PM
Name:                                                                             Date:
Instructor:                                                                         Course:
Managerial Accounting, 3rd Edition, by Weygandt, Kieso, and Kimmel
Solving Managerial Accounting Problems Using Microsoft Excel for Windows by Rex A Schildhouse
Exercise E4-4, Alonzo Inc. manufactures two products: car and truck wheels. To determine the amount of overhead to assign each product line,
the controller, YuYu Ortega, has developed the following information.
Car        Truck
Estimated wheels                   40,000     10,000
Direct labor hours per                  1           3
Total estimated overhead costs for the two product lines are          \$700,000

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

Direct labor hours for car wheels (40,000 X 1) =                         40,000
Direct labor hours for truck wheels (10,000 X 3) =                       30,000
Total direct labor hours                                                 70,000

\$10            per direct labor hour.
Total direct labor hours                        70,000

Car wheels (40,000 X \$10)                       \$400,000
Truck wheels (30,000 X \$10)                      300,000

(b) Ortega is not satisfied with the traditional method of allocating overhead because he believes that most of the overhead costs related 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 Pool Expected Use of Cost Drivers Estimated Overhead Costs                       ABC Overhead Rate
Setting up machines              1,000 setups                     \$180,000.00                                \$180.00
Assembling                     70,000 labor hours                 \$280,000.00                                   \$4.00
Inspection                       1,200 inspections                \$240,000.00                                \$200.00
Compute the activity-based overhead rates for these three cost pools.

(c) Compute the cost that is assigned to the car and truck product lines using an activity-based cost system, given the following information.

Setting up machines              1,000 setups                                  \$180,000.00                         \$180
Assembling                      70,000 labor hours                             \$280,000.00                           \$4
Inspection                       1,200 inspections                             \$240,000.00                         \$200

Car Wheels
Expected Use of Cost            Activity Based Overhead
Activity Cost Pool          Driver per Product                       Rates                      Cost Assigned
Setting up machines                   200                               \$180                                 \$36,000
Assembling                           40,000                              \$4                                 \$160,000
Inspection                            100                               \$200                                 \$20,000
Total cost                   \$216,000

Truck Wheels
Expected Use of Cost            Activity Based Overhead
Activity Cost Pool          Driver per Product                       Rates                      Cost Assigned
Setting up machines                   800                               \$180                                \$144,000
Assembling                           30,000                              \$4                                 \$120,000
Inspection                           1,100                              \$200                                \$220,000
Total cost                   \$484,000

(d) What do you believe Ortega should do? (Enter your text answer in the block below.)

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 allocation of
resources and pricing decisions in the future.

FileName: a28ae2dc-c811-4dc5-b57b-e9957b87cfb1.xls, Tab: Solution E4-4, Page 2 of 3, 11/5/2011, 11:35 PM
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