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 $17 per pound
Quality inspections Number of inspections $210 per inspection
Machine setups Number of machine setups $2,600 per setup
Running machines Number of machine-hours $22.00 per hour

Direct materials costs were $300,000 and direct labor costs were $150,000 during July, when the Fabrication Department handled 3,900 pounds of materials, made 790 inspections, had 50 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 tour overhead activity centers through Work in Process Inventory and out to Finished Goods Inventory.

Answer 1

Answer:

Southwest Components

T-accounts:

Raw materials Inventory

Date     Accounts Titles       Debit       Credit

July 31  Cash                      $300,000

July 31  Work in Process                     $300,000

Wages & Salaries Account

Date     Accounts Titles       Debit       Credit

July 31  Cash                      $150,000

July 31  Work in Process                     $150,000

Manufacturing Overhead

Date     Accounts Titles       Debit       Credit

July 31  Cash                      $714,200

July 31  Work in Process                     $714,200

Work in Process Inventory

Date     Accounts Titles       Debit       Credit

July 31  Raw materials       $300,000

July 31  Wages & Salaries    150,000

July 31  Overhead                714,200

July 31 Finished Goods Inventory      $1,164,000

Finished Goods Inventory

Date     Accounts Titles       Debit       Credit

July 31  Work in Process  $1,164,000

Explanation:

a) Data and Calculations:

Activity Centers        Cost Drivers                        Rate per Cost Driver Unit

Materials handling   Pounds of material handled           $17 per pound

Quality inspections  Number of inspections                $210 per inspection

Machine setups       Number of machine setups    $2,600 per setup

Running machines  Number of machine-hours      $22.00 per hour

Direct materials costs = $300,000

Direct labor costs = $150,000

Pounds of materials = 3,900

Inspections = 790

Setups = 50

Machine usage = 16,000 hours

b) Manufacturing Overhead costs, based on ABC:

Items                         Per unit cost                Units        Total cost

Materials handling   $17 per pound             3,900         $66,300

Quality inspections  $210 per inspection       790         165,900

Machine setups       $2,600 per setup             50         130,000

Running machines  $22.00 per hour       16,000        352,000

Total manufacturing overhead costs                          $714,200

b) It is assumed that there are no beginning and ending inventories.