The Mega Construction Company recently switched to activity-based costing (ABC)from the department allocation method.The department method allocated overhead costs at a rate of $60 per machine hour.The cost accountant for the Finishing Department has gathered the following data:
$$\begin{array} { | l | l | r | }
\hline \text { Activity } & \text { Cost Drivers } & \text { Rate } \
\hline \text { Material handling } & \text { Tons of material handled } & \$ 80 \
\hline \text { Machine setups } & \text { Number of production runs } & 3,750 \
\hline \text { Utilities } & \text { Machine hours } & 25 \
\hline \text { Quality control } & \text { Number of inspections } & 500 \
\hline
\end{array}$$
During April,Mega purchased and used $100,000 of direct materials at $20 per ton.There were eight (8)production runs using a total of 12,000 machine hours in April.The manager of the Finishing Department needed 12 inspections.Actual overhead costs totaled $820,000 for the month.How much overhead costs were applied to the Work-in-Process Inventory during April using traditional costing?

A) $536,000.
B) $720,000.
C) $736,000.
D) $820,000.

Question

The Mega Construction Company recently switched to activity-based costing (ABC)from the department allocation method.The department method allocated overhead costs at a rate of $60 per machine hour.The cost accountant for the Finishing Department has gathered the following data:
$$\begin{array} { | l | l | r | } 
\hline \text { Activity } & \text { Cost Drivers } & \text { Rate } \
\hline \text { Material handling } & \text { Tons of material handled } & \$ 80 \
\hline \text { Machine setups } & \text { Number of production runs } & 3,750 \
\hline \text { Utilities } & \text { Machine hours } & 25 \
\hline \text { Quality control } & \text { Number of inspections } & 500 \
\hline
\end{array}$$
 During April,Mega purchased and used $100,000 of direct materials at $20 per ton.There were eight (8)production runs using a total of 12,000 machine hours in April.The manager of the Finishing Department needed 12 inspections.Actual overhead costs totaled $820,000 for the month.How much overhead costs were applied to the Work-in-Process Inventory during April using traditional costing?

A) $536,000.
B) $720,000.
C) $736,000.
D) $820,000.

Quizplus · Accepted Answer

Under traditional department allocation method, the overhead costs are allocated based on the machine hours. The overhead rate per machine hour is $60. The total machine hours used in April by the Finishing Department were 12,000. Therefore, the overhead costs allocated to the department would be:
Overhead allocated to Finishing Department = Machine Hours x Overhead rate
Overhead allocated to Finishing Department = 12,000 x $60
Overhead allocated to Finishing Department = $720,000
Hence, the overhead costs applied to Work-in-Process Inventory during April using traditional costing would be $720,000.

The Mega Construction Company Recently Switched to Activity-Based Costing (ABC)from