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

Exercise 31

Activity-Based Costing: Cost Flows through T-Accounts

Carolina Fashions, a shirt manufacturer, recently switched to activity-based costing from the department product costing method. The manager of Building S, which manufactures the shirts, has identified the following cost drivers and rates for overhead:

Activity Centers	Cost Drivers	Rate per Cost Driver Unit
Materials handling	Yards of material handled	$1 per yard
Quality inspections	Number of inspections	$100 per inspection
Machine setups	Number of machine setups	$800 per setup
Running machines	Number of machine-hours	$10 per hour

Direct materials costs were $200,000 and direct labor costs were $100,000 during October, when Building S handled 40,000 yards of materials, made 800 inspections, had 100 setups, and ran the machines for 20,000 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 (40,000 ×$1)		$ 40,000	$ 40,000
	Transfer to Work in process inventory			$ 40,000