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

Quizplus · Accepted Answer

Under the traditional costing method, overhead costs are allocated based on a predetermined rate per machine hour. In this case, the rate is $60 per machine hour. Therefore, the total overhead cost applied to the WIP inventory during April using traditional costing is calculated as follows:

Overhead rate per machine hour = $60 
Total machine hours used = 12,000 
Total overhead applied = $60 x 12,000 = $720,000

Therefore, the correct answer is B) $720,000.

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