Southwest Components recently switched to activity-based costing from the depart

Question

Southwest Components recently switched to activity-based costing from the department allocation method. The Fabrication Department manager has estimated the following cost drivers and rates:

Direct materials costs were $287,000 and direct labor costs were $146,000 during July, when the Fabrication Department handled 3,600 pounds of materials, made 780 inspections, had 30 setups, and ran the machines for 14,000 hours.

Required:

Use T-accounts to show the flow of materials, labor, and overhead costs from the four overhead activity centers through Work-in-Process Inventory and out to Finished Goods Inventory.

Activity Centers Cost Drivers Rate per
Cost Driver Unit Materials handling Pounds of material handled $ 18 per pound Quality inspections Number of inspections $ 220 per inspection Machine setups Number of machine setups $ 2,900 per setup Running machines Number of machine-hours $ 25.00 per hour

Explanation / Answer

Raw material Explanation Debit Explanation Credit Bal (assumed) 0 0 Work in process 287000 Wages Explanation Debit Credit Bal (assumed) 0 Work in process 146000 Overhead applied-Materials handling Explanation Debit Credit Bal (assumed) 0 Work in process (3600*18) 64800 Overhead applied-Quality inspections Explanation Debit Credit Bal (assumed) 0 Work in process (780*220) 171600 Overhead applied-Machine setups Explanation Debit Credit Bal (assumed) 0 Work in process (2900*30) 87000 Overhead applied-Running machines Explanation Debit Credit Bal (assumed) 0 Work in process (14000*25) 350000 Work in process Explanation Debit Credit Bal (assumed) 0 Raw material 287000 Wages 146000 Overhead applied-Materials handling 64800 Overhead applied-Quality inspections 171600 Overhead applied-Machine setups 87000 Overhead applied-Running machines 350000 Finished goods 1106400 1106400 1106400 Finished goods Explanation Debit Credit Bal (assumed) 0 Work in process 1106400 Bal 11064000 1106400

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