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. **Educational Website: Accounting and Finance**---### Flow of Costs through Overhead Centers: T-Account BreakdownThis image displays a set of T-accounts used to illustrate the flow of materials, labor, and overhead costs through various stages of production, ultimately reaching the Finished Goods Inventory. Each account helps track specific costs during production.#### Components:1. **Materials Inventory** - **Structure**: A typical T-account with columns for debits and credits, as well as beginning and ending balances. - **Function**: Tracks the cost of raw materials available and used during production.2. **Wages Payable** - **Structure**: Standard T-account format. - **Function**: Records labor costs that are due but not yet paid.3. **Overhead Applied Accounts**: - **Materials Handling** - **Purpose**: Captures the overhead costs related to handling and managing materials. - **Quality Inspections** - **Purpose**: Records overhead costs incurred from inspection activities to ensure quality standards. - **Machine Setups** - **Purpose**: Logs costs from setting up machinery for different production runs. - **Running Machines** - **Purpose**: Details overhead costs for operating machines during production.4. **Work in Process (WIP) Inventory – Fabrication Department** - **Structure**: T-account format to monitor production costs. - **Function**: Combines costs from materials, labor, and allocated overhead during the production process.5. **Finished Goods Inventory** - **Structure**: Final T-account in this flowchart. - **Function**: Shows costs transferred from WIP to finished products ready for sale.---Each T-account has columns for beginning balance (Beg. bal.) and ending balance (End. bal.) to show the flow of costs. This setup is crucial for managing financial records in manufacturing, helping differentiate costs at varied production stages. **Southwest Components: Activity-Based Costing Overview**Southwest Components recently adopted activity-based costing (ABC) instead of the traditional department allocation method. Below are the detailed cost drivers and rates estimated by the Fabrication Department manager:**Activity Centers and Cost Details:**1. **Materials Handling** - **Cost Driver:** Pounds of material handled - **Rate:** $0.80 per pound2. **Quality Inspections** - **Cost Driver:** Number of inspections - **Rate:** $450 per inspection3. **Machine Setup** - **Cost Driver:** Number of machine setups - **Rate:** $5,400 per setup4. **Running Machines** - **Cost Driver:** Number of machine-hours - **Rate:** $0.45 per hour**July Cost Summary:**- Direct materials costs: $600,000- Direct labor costs: $300,000 During July, the Fabrication Department managed:- 3,000 pounds of materials- 500 inspections- 25 setups- 10,000 machine hours**Required Analysis:**Use T-accounts to trace materials, labor, and overhead costs from the various activity centers through the Work-in-Process Inventory and out to the Finished Goods Inventory.**T-Account Structure Overview:**1. **Materials Inventory** - Start Balance (Beg. bal.) - Transactions (entries/exits) - End Balance (End. bal.)2. **Wages Payable**3. **Overhead Applied Categories:** - **Materials Handling** - **Quality Inspections** - **Machine Setup** - **Running Machines**4. **Work in Process (WIP) Inventory: Fabrication Department**5. **Finished Goods Inventory**Each T-account starts with a beginning balance, records the relevant transactions, and concludes with an ending balance. These accounts help in monitoring the cost flow through various stages of production, providing detailed insights into where and how costs are allocated in the manufacturing process using activity-based costing.

T Account It is a visual representations of individual accounts showing business transactions of an enterprise.

Southwest Components recently switched to activity-based costing from the department allocation method. The Fabrication Department manager has estimated the following cost drivers and rates Cost Drivers Pounde of saterial handled unber of inapectione Munber of nachine setupe uber of achine-bours ate per Cont Driver it per pound 450 per inepection 5,400 per setup 45 per hour Activity Centers Quality inapections Machine setupe huseing sachines Direct materials costs were $600,000 and direct labor costs were $300,000 during July, when the Fabrication Department handled 3.000 pounds of materials, made S00 inspections, had 25 setups, and ran the machines for 10,000 hours Required Use T-accounts to show the flow of materials, labor, and overhead costs trom the four overhead activity centers through Work-in- Process Inventory and out to Finished Goods inventory. Materials inventory Wages Payable Bng be Deg b End be End be Overhead Apped Materials Handing Overhead Appled Quality inpection Ce b Deg te End be End be Overtead Appled Machine Betups Overhead Applied Running Machines Deg ba Deg be End Se End be Work in Process (wP) ventery Fabrication Departant Finished Goods Invenory

Southwest Components recently switched to activity-based costing from the department allocation method. The Fabrication Department manager has estimated the following cost drivers and rates Cost Drivers Pounde of saterial handled unber of inapectione Munber of nachine setupe uber of achine-bours ate per Cont Driver it per pound 450 per inepection 5,400 per setup 45 per hour Activity Centers Quality inapections Machine setupe huseing sachines Direct materials costs were $600,000 and direct labor costs were $300,000 during July, when the Fabrication Department handled 3.000 pounds of materials, made S00 inspections, had 25 setups, and ran the machines for 10,000 hours Required Use T-accounts to show the flow of materials, labor, and overhead costs trom the four overhead activity centers through Work-in- Process Inventory and out to Finished Goods inventory. Materials inventory Wages Payable Bng be Deg b End be End be Overhead Apped Materials Handing Overhead Appled Quality inpection Ce b Deg te End be End be Overtead Appled Machine Betups Overhead Applied Running Machines Deg ba Deg be End Se End be Work in Process (wP) ventery Fabrication Departant Finished Goods Invenory

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

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Concept explainers

Manufacturing Costs

Manufacturing cost is the total cost of procuring or producing a product. In other words, the manufacturing cost is the cost that an individual or business owner undertakes for the manufacturing of goods.

Question

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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.

**Educational Website: Accounting and Finance**

---

### Flow of Costs through Overhead Centers: T-Account Breakdown

This image displays a set of T-accounts used to illustrate the flow of materials, labor, and overhead costs through various stages of production, ultimately reaching the Finished Goods Inventory. Each account helps track specific costs during production.

#### Components:

1. **Materials Inventory**
- **Structure**: A typical T-account with columns for debits and credits, as well as beginning and ending balances.
- **Function**: Tracks the cost of raw materials available and used during production.

2. **Wages Payable**
- **Structure**: Standard T-account format.
- **Function**: Records labor costs that are due but not yet paid.

3. **Overhead Applied Accounts**:

- **Materials Handling**
- **Purpose**: Captures the overhead costs related to handling and managing materials.

- **Quality Inspections**
- **Purpose**: Records overhead costs incurred from inspection activities to ensure quality standards.

- **Machine Setups**
- **Purpose**: Logs costs from setting up machinery for different production runs.

- **Running Machines**
- **Purpose**: Details overhead costs for operating machines during production.

4. **Work in Process (WIP) Inventory – Fabrication Department**
- **Structure**: T-account format to monitor production costs.
- **Function**: Combines costs from materials, labor, and allocated overhead during the production process.

5. **Finished Goods Inventory**
- **Structure**: Final T-account in this flowchart.
- **Function**: Shows costs transferred from WIP to finished products ready for sale.

---

Each T-account has columns for beginning balance (Beg. bal.) and ending balance (End. bal.) to show the flow of costs. This setup is crucial for managing financial records in manufacturing, helping differentiate costs at varied production stages.

**Southwest Components: Activity-Based Costing Overview**

Southwest Components recently adopted activity-based costing (ABC) instead of the traditional department allocation method. Below are the detailed cost drivers and rates estimated by the Fabrication Department manager:

**Activity Centers and Cost Details:**

1. **Materials Handling**
- **Cost Driver:** Pounds of material handled
- **Rate:** $0.80 per pound

2. **Quality Inspections**
- **Cost Driver:** Number of inspections
- **Rate:** $450 per inspection

3. **Machine Setup**
- **Cost Driver:** Number of machine setups
- **Rate:** $5,400 per setup

4. **Running Machines**
- **Cost Driver:** Number of machine-hours
- **Rate:** $0.45 per hour

**July Cost Summary:**
- Direct materials costs: $600,000
- Direct labor costs: $300,000

During July, the Fabrication Department managed:
- 3,000 pounds of materials
- 500 inspections
- 25 setups
- 10,000 machine hours

**Required Analysis:**
Use T-accounts to trace materials, labor, and overhead costs from the various activity centers through the Work-in-Process Inventory and out to the Finished Goods Inventory.

**T-Account Structure Overview:**

1. **Materials Inventory**
- Start Balance (Beg. bal.)
- Transactions (entries/exits)
- End Balance (End. bal.)

2. **Wages Payable**

3. **Overhead Applied Categories:**
- **Materials Handling**
- **Quality Inspections**
- **Machine Setup**
- **Running Machines**

4. **Work in Process (WIP) Inventory: Fabrication Department**
5. **Finished Goods Inventory**

Each T-account starts with a beginning balance, records the relevant transactions, and concludes with an ending balance. These accounts help in monitoring the cost flow through various stages of production, providing detailed insights into where and how costs are allocated in the manufacturing process using activity-based costing.

Definition Definition Indirect costs incurred while producing goods or services. Overhead costs cannot be directly attributed to products or services. Overhead includes indirect material cost, indirect labor cost, rent, utilities expenses, and depreciation. Since these costs directly affect the profitability of a company, managing overhead becomes an important task for management.

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