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:

Activity Centers	Cost Drivers	Rate per Cost Driver Unit
Materials handling	Pounds of material handled	$	19	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	$	24.00	per hour

Direct materials costs were $285,000 and direct labor costs were $156,000 during July, when the Fabrication Department handled 3,600 pounds of materials, made 770 inspections, had 30 setups, and ran the machines for 16,000 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.

Answer 1

ANSWER

M.OH Computation
Materials Handling Cost			$ 68,400.00	($ 19 x 3,600 pounds)
Quality Inspection Cost			$ 169,400.00	($ 220 x 770 inspections)
Machine Setup Cost			$ 87,000.00	($ 2,900 x 30 setups)
Machine Running Cost			$ 384,000.00	($ 24.00 x 16,000 hours)
			$ 708,800.00

T- Accounts
Work in Process (WIP)					Finished Goods (FG)
To D.M	$285,000 .00	By F.G	$ 1,149,800.00		To WIP	$ 1,149,800.00	By COGS	$ 1,149,800.00
To D.L	$156,000 .00					$ 1,149,800.00		$ 1,149,800.00
To M.OH	$      708,800.00		$                       -
	$1,149,800.00		$ 1,149,800.00
D.M =	Direct Materials				WIP =	Work in Process
D.L =	Direct Labor				COGS =	Cost of Goods
M.OH =	Manufacturing Overheads					sold

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