ACC10007 Lecture Notes - Lecture 6: Cost Driver, Price Skimming, Indirect Costs
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Deriving full costs in a single-product / single-service operation. Assume a business has only one product line or service, and each unit is identical. Product cost per unit could be calculated as: the total cost of production (eg direct material, direct labour, factory rent, maintenance, electricity, depreciation of equipment) divided by the number of units produced. Process costing is used when the units of output are identical, or very similar. The t(cid:455)pe of (cid:272)osti(cid:374)g s(cid:455)ste(cid:373) is i(cid:374)flue(cid:374)(cid:272)ed (cid:271)(cid:455) a(cid:374) e(cid:374)tit(cid:455)"s produ(cid:272)t ra(cid:374)ge a(cid:374)d pro(cid:272)esses. A direct cost is a cost that can be easily identified or traced to a cost object (eg direct material & direct labour costs to make a pair of jeans). The cost of a zip used in making a pair of jeans is an example of a direct material cost. Direct costs are considered to vary in proportion to the number of units.
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| The Big Bus Company manufactures two products, Product 1 and Product 2. Product 2 was developed as an attempt to enter a market closely related to that of Product 1. Product 2 is the more complex of the two products, requiring three hours of direct labour time per unit to manufacture compared to one and one-half hours of direct labour time for Product 1. Product 2 is produced on an automated production line. Overhead is currently assigned to the products on the basis of direct labour-hours. The company estimated it would incur a total of $396,000 in manufacturing overhead costs and produce 5,500 units of Product 2 and 22,000 units of Product 1 during the current year. Unit costs for materials and direct labour are: | ||||||||||||
| Product 1 | Product 2 | |||||||||||
| Direct Labour | $7 | $15 | ||||||||||
| Direct material | $9 | $20 | ||||||||||
| Required: | ||||||||||||
| a. Compute the predetermined overhead rate under the current method of allocation and determine the unit product cost of each product for the current year. (5 marks) | ||||||||||||
| Product 1 | Product 2 | Total | Allocation | |||||||||
| Direct Labour hour / unit | 1.5 | 3 | 396,000 / 49,500 | |||||||||
| units produced | 22,000 | 5,500 | 8 | |||||||||
| total labour hour | 33,000 | 16,500 | 49,500 | |||||||||
| overhead/unit | 12 | 24 | overhead/unit is calculated by direct LH x 8 | |||||||||
| Product 1 | Product 2 | |||||||||||
| Direct material | 9 | 20 | ||||||||||
| Direct labour | 7 | 15 | ||||||||||
| overhead/unit | 16 | 35 | ||||||||||
| cost/unit | 32 | 70 | ||||||||||
| b. The company's overhead costs can be attributed to four major activities. These activities and the amount of overhead cost attributable to each for the current year are given below: (5 marks) | ||||||||||||
| Expected Activity | ||||||||||||
| Activity Costs Pools | Estimated Overhead Costs | Product 1 | Product 2 | Total | ||||||||
| Machine set-ups required | $170,000 | 700 | 1,000 | 1,700 | ||||||||
| Purchase orders issued | 37,000 | 300 | 200 | 500 | ||||||||
| Machine-hours required | 91,000 | 4,000 | 9,000 | 13,000 | ||||||||
| Maintenance requests issued | 98,000 | 400 | 600 | 1,000 | ||||||||
| $396,000 | ||||||||||||
| Using the data above and an activity-based costing approach, determine the unit product cost of each product for the current year. | ||||||||||||
| Total Cost | Product A | Product B | ||||||||||
| Machine Setups | 170,000 | 70,000 | 100,000 | |||||||||
| purchase order | 37,000 | 22,200 | 14,800 | |||||||||
| machine hours | 91,000 | 28,000 | 63,000 | |||||||||
| maintenance requests | 98,000 | 39,200 | 58,800 | |||||||||
| Total | 396,000 | 159,400 | 236,600 | |||||||||
| 22,000 | 5,500 | |||||||||||
| overhead /cost | 7..25 | 43..02 | ||||||||||
| product 1 | product 2 | |||||||||||
| Direct Labour | 9 | 20 | ||||||||||
| direct material | 7 | 15 | ||||||||||
| overhead / unit | 7..25 | 43.02. | ||||||||||
| Unit/ cost | 23..25 | 78.020. | ||||||||||
| Hermon Company, amanufacturing company, produces a single product. Thefollowing | ||||||
| information has been takenfrom the company's production, sales, and cost records for the | ||||||
| just completed year. | ||||||
| Hermon Company | ||||||
| Production in units | 29,000 | |||||
| Sales in units | ? | |||||
| Ending finished goods inventory inunits | ? | |||||
| Sales in dollars | $1,300,000 | |||||
| Costs: | ||||||
| Advertising | $105,000 | |||||
| Entertainment and travel | $40,000 | |||||
| Direct labor | $90,000 | |||||
| Indirect labor | $85,000 | |||||
| Raw materials purchased | $480,000 | |||||
| Building rent (production uses 80% of thespace; | ||||||
| administrative andsales offices use the rest) | $40,000 | |||||
| Utilities, factory | $108,000 | |||||
| Royalty paid for use of production patent,$1.50 | ||||||
| per unit produced | ? | |||||
| Maintenance, factory | $9,000 | |||||
| Rent for special production equipment,$7,000 per | ||||||
| year plus $0.30 perunit produced | ? | |||||
| Selling and administrative salaries | $210,000 | |||||
| Other factory overhead costs | $6,800 | |||||
| Other selling and administrativeexpenses | $17,000 | |||||
| Inventories: | Beginning | End of | ||||
| of the Year | theYear | |||||
| Raw materials | $20,000 | $30,000 | ||||
| Work in process | $50,000 | $40,000 | ||||
| Finished goods | $0 | ? | ||||
| The finished goods inventoryis being carried at the average unit production cost for theyear. | ||||||
| The selling price is $50 per unit. | ||||||
| Required: Use the P3 Solution Sheet | ||||||
| 1. Prepare a schedule of costof goods manufactured for the year. | ||||||
| 2. Compute the following: | ||||||
| a.The number of units in the finished goods inventory at the end ofthe year. | ||||||
| b.The cost of the units in the finished goods inventory at the end ofthe year. | ||||||
| 3. Prepare an income statement for theyear. | show all work | |||||
