The LMN 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 Department XZ has gathered the following data: During April,LMN 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 Department XZ 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 activity-based costing?
A)$536,000.
B)$720,000.
C)$736,000.
D)$820,000.

Question

The LMN 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 Department XZ has gathered the following data:  During April,LMN 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 Department XZ 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 activity-based costing?
A)$536,000. 
B)$720,000. 
C)$736,000. 
D)$820,000.

Quizplus · Accepted Answer

First, we need to calculate the activity rates for each cost pool:
- Materials handling: $100,000 / 8 runs = $12,500 per run
- Machine setups: $240,000 / 100 setups = $2,400 per setup
- Inspection: $72,000 / 12 inspections = $6,000 per inspection
- Machine use: $508,000 / 12,000 machine hours = $42.33 per machine hour

Then, we can calculate the overhead costs applied to the Work-in-Process Inventory using ABC:
- Materials handling: 8 runs * $12,500 per run = $100,000
- Machine setups: 40 setups (based on the number of runs) * $2,400 per setup = $96,000
- Inspection: 12 inspections * $6,000 per inspection = $72,000
- Machine use: 12,000 machine hours * $42.33 per machine hour = $507,960

Total overhead costs applied: $100,000 + $96,000 + $72,000 + $507,960 = $775,960
This is closest to answer C) $736,000, which is the best choice.

The LMN Company Recently Switched to Activity-Based Costing (ABC)from the Department