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 $ 16 per pound
Quality inspections Number of inspections $ 240 per inspection
Machine setups Number of machine setups $ 2,700 per setup
Running machines Number of machine-hours $ 21.00 per hour
Direct materials costs were $306,000 and direct labor costs were $161,000 during July, when the Fabrication Department handled 3,900 pounds of materials, made 760 inspections, had 50 setups, and ran the machines for 13,000 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:

Direct Materials T - Account

Debit :

Cash                            $306,000

Totals                          $306,000

Credit:

Work In Process         $306,000

Totals                          $306,000

Direct Labor T - Account

Debit :

Cash                            $161,000

Totals                          $161,000

Credit:

Work In Process          $161,000

Totals                           $161,000

Overhead T - Account

Debit :

Cash                                                                            $652,800

Totals                                                                          $652,800

Credit:

Work In Process :

Materials handling ( $ 16 × 3,900 pounds)                 $62,400

Quality inspections ( $ 240 × 760 inspections)         $182,400

Machine setups ( $ 2,700 × 50 setups)                     $135,000

Running machines ( $ 21.00 × 13,000 hours)           $273,000

Totals                                                                          $652,800

Work In Process T - Account

Debit :

Direct Materials         $306,000

Direct Labor                $161,000

Overheads                $652,800

Totals                        $1,119,800

Credit:

Finished Goods        $1,119,800

Totals                        $1,119,800

Explanation:

Direct Materials T - Account

Accumulates Material costs used in manufacturing process

Direct Labor T - Account

Accumulated labor costs used in manufacturing process

Overhead T - Account

Accumulated Overhead costs incurred in manufacture

Work In Process T - Account

Accumulates total costs used in manufacture and transfers the cost to Finished Goods inventory