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	$	2,500	per setup
Running machines	Number of machine-hours	$	22.00	per hour

Direct materials costs were $282,000 and direct labor costs were $139,000 during July, when the Fabrication Department handled 3,500 pounds of materials, made 760 inspections, had 40 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

Base Information to solve above Question:

Southwest Component- Activity Based Costing
Activity	Cost Driver	Rate per cost driver Unit
Material handling	Pounds Material Handling	$	17	Per pound
Quality Inspection	Number of inspections	$	210	Per Inspection
Machine setups	Number of machine setups	$	2500	Per Setup
Running machines	Number of machine-hours	$	22	Per Hour
Direct Material Cost		$	2,82,000
Direct Labour Cost		$	1,39,000
Fabrication Deptt
material	3500	Pounds
Inspection	760
Set Up	40
Machine Hr	16000

All Number in T Accounts has been derived and step wise mentioned as below :

Overhead Material Handing ($)	59500	(a)*(b)
material	3500	Pounds(a)
Pounds Material Handling ($)	17	Per pound (b)
Overhead Quality Inspection($)	159600	(c*D)
Inspection No	760	(c)
Number of inspections($)	210	Per Inspection(D)
Overhead Machine Set up($)	100000	E*f
Set Up No	40	(e)
Number of machine setups($)	2500	Per Setup(f)
Overhead Machine Hour($)	352000	(g*h)
Machine Hr	16000	(g)
Number of machine-hours-$	22	Per Hour(h)

Material Inventory
Opening Bal($)	0	WIP($)	2,82,000
End Bal ($)	0
Wages Payable
Opening Bal($)	0	WIP($)	1,39,000
End Bal ($)	0
Overhead Material Handling
Opening Bal($)	0	WIP($)	59,500
End Bal ($)	0

Overhead Quality Inspection
Opening Bal($)	0	WIP($)	1,59,600
End Bal ($)	0
Overhead Machine Set Up
Opening Bal($)	0	WIP($)	1,00,000
End Bal ($)	0
Overhead Machine Hour
Opening Bal($)	0	WIP($)	3,52,000
End Bal ($)	0

Work In Proces
Opening Bal($)	0	Finished Goods	10,92,100
Material Inventory	2,82,000
Wages payable	1,39,000
Overhead Material Handing	59,500
Overhead Quality Inspection	1,59,600
Overhead Machine Set up	1,00,000
Overhead Machine Hour	3,52,000

Finished Goods
Opening Bal($)	0
WIP	10,92,100
End Balance	10,92,100

WIP ( Work In process ) is combination of all individual derived number as mentioned in above step wise . Total WIP balance finally transfer to Finished goods .