Schwynn Inc. manufactures street bicycle tires and mountain bicycle tires. To determine the amount of overhead to assign to each product line, the controller, Chu, has developed the following information.
| Estimated tires produced | 25,000 | 15,000 |
| Direct labor hours per tire | 2 | 4 |
Total estimated overhead costs for the two product lines are $990,000.
Required:
| a. | Compute the overhead cost assigned to the street tires and mountain tires, assuming |
the
company uses a single cost pool and direct labor hours to allocate overhead costs.
| b. | Chu is not satisfied with the traditional method of allocating overhead because he |
believes
that most of the overhead costs relate to the mountain tire product line because of its
complexity. He therefore develops the following three activity cost pools and related
cost drivers to better understand these costs.
| | Expected Use of | Estimated Overhead | |
| Activity Cost Pools | Cost Drivers | Costs | |
| Setting up machines | 500 setups | $ 90,000 |
| Assembling | 40,000 labor hours | 500,000 |
| Inspection | 500 inspections | 400,000 |
Compute the activity-based overhead rates for these three cost pools.
| c. | Compute the cost that is assigned to the street tires and mountain tires product lines |
using an activity-based costing system, given the following information.
| Expected Use of Cost Drivers per Product |
| Direct labor hours | 25,000 | 15,000 |
| Number of inspections | 180 | 320 |
| d. | What do you believe Chu should do? |