Southwest Components recently switched to activity-based costing from the depart
ID: 2490752 • Letter: S
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 $600,000 and direct labor costs were $300,000 during July, when the Fabrication Department handled 3,000 pounds of materials, made 500 inspections, had 25 setups, and ran the machines for 10,000 hours.
Activity Centers Cost Drivers Rate perCost Driver Unit Materials handling Pounds of material handled $ 36 per pound Quality inspections Number of inspections $ 450 per inspection Machine setups Number of machine setups $ 5,400 per setup Running machines Number of machine-hours $ 45 per hour
Explanation / Answer
T accounts
DR:::::::Raw Material Inventory=$600,000::::::::CR::::::Overhead applied in Materials:::::$108,000
DR::::::Wages payable ::::::::::::$300,000 ::::::::CR:::::::Quality Inspection::::::::::::::::::::::$225,000
:::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::CR::::::Machine Setup ::::::::::::::::::::::::::$135,000
:::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::CR::::::Running machines Hours:::::::::::::$450,000
Overhead applied in Materials:::::$108,000 to Work in process
Quality Inspection::::::::::::::::::::::$225,000 to Work in process
Machine Setup ::::::::::::::::::::::::::$135,000 to Work in process
Running machines Hours:::::::::::::$450,000 to Work in process
Calculation:
Overhead applied in Materials
3,000 pounds of materials * $36 = $108,000
Quality Inspection
500 * $450 = $225,000
Machine Setup
25 * $5,400 =$135,000
Running machines
10,000 hours * $45 =$450,000
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