Harbor Wheel Company manufactures two tractor wheels: the Ultimate which sells for $1,600 and the Standard, which sells for $1,300. The company currently uses traditional costing and assigns overhead on the basis of direct labor hours (DLH). Total estimated overhead was $7,600,000 and estimated total direct labor hours were 200,000. Management is considering using actity-based costing to compare overhead allocations before making a final decision. Current Traditional Costing:
Ultimate Standard
Direct materials per wheel $700 $420
Direct labor cost per wheel $120 $100
Direct labor hours per wheel 6 5
Total units produced 25,000 10,000
Activity-Based Costing:
Activity Cost Cost Estimated Expected Use Ultimate Standard
Pools Drivers Overhead of Cost Drivers
Purchasing purchase orders $1,200,000 40,000 17,000 23,000
Machine setups machine setups 900,000 18,000 5,000 13,000
Machining machine hours 4,800,000 120,000 75,000 45,000
Quality Control inspections 700,000 28,000 11,000 17,000
$7,600,000
INSTRUCTIONS:
Using the information above, match each item with the correct answer. Hint: Each item has only one correct answer. Overhead applied to a single Ultimate wheel using traditional costing:
Overhead applied to a single Ultimate wheel using traditional costing:
Total manufacturing cost of the Standard wheel using traditional costing:
Activity-based overhead rate for Quality Control:
Machining overhead applied to the Standard wheel using activity-based costing:
Total manufacturing overhead applied to each Ultimate wheel using activity-based costing:

Harbor Wheel Company

Overhead applied to a single Ultimate wheel using traditional costing:

= $228

Overhead applied to a single Standard wheel using traditional costing:

= $190

Total manufacturing cost of the Standard wheel using traditional costing:

= $710,000 ($710 * 10,000)

Activity-based overhead rate for Quality Control:

= $25

Machining overhead applied to the Standard wheel using activity-based costing:

= $1,000,000

Total manufacturing overhead applied to each Ultimate wheel using activity-based costing:

= $161.40

Explanation:

a) Data and Calculations:

Total estimated overhead = $7,600,000

Estimated total direct labor hours = 200,000

Predetermined overhead rate = $38 per direct labor hour ($7,600,000/200,000)

Current Traditional Costing:

                                              Ultimate    Standard

Selling price per unit             $1,600         $1,300

Direct materials per wheel      $700           $420

Direct labor cost per wheel     $120            $100

Overhead applied per wheel $228            $190

Total cost per wheel            $1,048             $710

Direct labor hours per wheel    6                  5

Total units produced       25,000         10,000

Overhead to a single wheel $228 (6* $38)         $190 (5 * $38)

Activity-Based Costing:

Activity Cost            Cost               Estimated  Expected Use of Cost Drivers

Pools                     Drivers              Overhead           Total Ultimate Standard

Purchasing         purchase orders  $1,200,000    40,000    17,000   23,000

Machine setups machine setups       900,000     18,000     5,000    13,000

Machining          machine hours      4,800,000   120,000   75,000   45,000

Quality Control  inspections               700,000    28,000     11,000    17,000

Total                                               $7,600,000

Activity-based overhead rates

Purchasing = $30 ($1,200,000/40,000)

Machine setups = $50 ($900,000/18,000)

Machining = $40 ($4,800,000/120,000)

Quality control = $25 ($700,000/28,000)

Machining overhead applied to the Standard wheel using activity-based costing = $1,000,000 ($40 * 45,000)

Total manufacturing overhead applied to each Ultimate wheel using activity-based costing:

Purchasing = $510,000 ($30 * 17,000)

Machine setups = $250,000 ($50 * 5,000)

Machining = $3,000,000 ($40 * 75,000)

Quality control = $275,000 ($25 * 11,000)

Total overhead = $4,035,000

Total units = 25,000

Overhead cost per wheel = $161.40 ($4,035,000/25,000)

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