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

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

Step-by-step 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.