Fundamentals of Cost Accounting 3rd Edition by William N. Lanen, Shannon W. Anderson, Michael Maher

Exercise 30

Activity-Based Costing: Cost Flows through T-Accounts

Delta Parts, Inc., 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	$18 per pound
Quality inspections	Number of inspections	$225 per inspection
Machine setups	Number of machine setups	$2,700 per setup
Running machines	Number of machine-hours	$22.50 per hour

Direct materials costs were $300,000 and direct labor costs were $150,000 during July, when the Fabrication Department handled 3,750 pounds of materials, made 750 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. Use the accounts Materials Inventory, Wages Payable, Work-in-Process Inventory, Finished Goods Inventory, and four overhead applied accounts.

Step 1 of 14

Prepare T- accounts to show the flow of materials, labor, and overhead cost from the four overhead activity centers through work-in-process inventory and out to finished goods inventory:

Materials inventory:

Date	Account title	Debit	Credit	Balance
	Work in process inventory (3,750 ×$18)		$ 67,500	$ 67,500
	Transfer to Work in process inventory			$ 67,500