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Altex Inc

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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

(a) Compute the overhead cost assigned to the car wheels 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.

Activity Cost Pools Expected Use of Cost Drivers   Estimated Overhead Costs
Setting up machines  1,000 setups $220,000
Assembling  70,000 labor hours 280,000
Inspection  1,200 inspections 270,000
Compute the activity-based overhead rates for these three cost pools.

(c) Compute the cost that is assigned to the car wheels and truck wheels product lines
using an activity-based costing system, given the following information.
Expected Use of Cost Drivers per Product

  Car  Truck 
Number of setups  200 800
Direct labor hours  40,000 30,000
Number of inspections  100 1,100

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