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	$	15	per pound
Quality inspections	Number of inspections	$	230	per inspection
Machine setups	Number of machine setups	$	2,700	per setup
Running machines	Number of machine-hours	$	22.00	per hour

Direct materials costs were $304,000 and direct labor costs were $131,000 during July, when the Fabrication Department handled 3,800 pounds of materials, made 780 inspections, had 40 setups, and ran the machines for 15,000 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.

Materials Inventory Wages Payable Beg bal Beg. bal. End. bal. End. bal. Overhead Applied: Materials Handling Overhead Applied: Quality Inspections Beg. bal. Beg. bal. End, bal. End. bal. Overhead Applied: Machine Setups Overhead Applied: Running Machines Beg. bal Beg. bal. End, bal. End. bal. Work in Process (WIP) Inventory Fabrication Department Finished Goods Inventory Beg. bal Beg. bal End, bal. End. bal.

Answer 1

1. Raw Material Inventory A/c Dr. $ 304,000

To Cash/ Accounts Payable $ 304,000

(Being raw materials purchased)

2. Wages Payable A/c Dr. $ 131,000

To Cash $ 131,000

(Being wages paid)

3. Material handing overhead A/c Dr. $ 57,000

To Accounts payable $ 57,000

(Being overhead applied i.e. 3800* $15)

4. Quality Inspections Overhead A/c Dr. $ 179,400

To accounts payable A/c $ 179,400

(Being overhead applied i.e. 780 * $230)

5. Machine setups overhead A/c Dr. $ 108,000

To accounts payable A/c $ 108,000

(Being overhead applied i.e. 40 * $2700)

6. Running machines overhead A/c Dr. $ 330,000

To accounts payable A/c $ 330,000

(Being overhead applied i.e. 15000 * $22)

7. Work in Process A/c Dr. $ 1,109,400

To raw material inventory $ 304,000

To wages payable $ 131,000

To material handling overhead $ 57,000

To quality inspection overhead $ 179,400

To machine setups overhead $ 108,000

To running machines overhead $ 330,000

(Being manufacturing costs transferred to WIP account)

8. Finished goods inventory A/c Dr. $ 1,109,400

To Work in process A/c $ 1,109,400

(Being WIP transferred to Finished goods account, assuming that the entire WIP has been converted into finished goods)