Costing a Product In a manufacturing environment, cost of a product is made up of three components: Directs costs are also known as "traceable costs because they can be easily traced to a cost object Indirect costs cannot be traced to objects in a cost-effective manner. These are known as overhead costs. Allocation of these costs are done by computing a Predetermined Overhead Rate using estimates. Predetermined Overhead Rate What is another term for "cost driver? The overhead costs are applied to the cost of the product using the following formula: Predetermined OH Rate x Actual Usage of Cost Driver = Amount to Apply Here'a "Manufacturing Overhead" T-Account (an expense account that gets closed) MOH I 1 Overhead could be overapplied" or "underapplied": MOH 1 I MOH 1 I Problem 12-18 Allocation to accomplish smoothing Velez Corporation estimated its overhead costs would be $50,000 per month except for January when it pays the $30,000 annual insurance premium on the manufacturing facility. Accordingly, the January overhead costs were expected to be $80,000 ($30,000 + $50,000). The company expected to use 7,000 direct labor hours per month except during July, August, and September when the company expected 9.000 hours of direct labor each month to build inventories for high demand that normally occurs dur- ing the Christmas season. The company's actual direct labor hours were the same as the estimated hours. The company made 3,500 units of product in each month except July, August, and September, in which it produced 4,500 units each month. Direct labor costs were $30 per unit, and direct materials costs were $25 per unit. Required a Calculate a predetermined overhead rate based on direct labor hours. b. Determine the total allocated overhead cost for January, March, and August. c. Determine the cost per unit of product for January, March, and August d. Determine the selling price for the product, assuming that the company desires to earn a gross margin of $20 per unit. a. The items used to compute the predetermined overhead rate : Total Expected Overhead Costs = Total Expected Labor Hours = The rate is computed as follows: b. c. & d. January | March | August 7,000 7,000 9,000 3,500 3,500 4.$00 Direct labor hours Units produced Indirect cost cost cost Total estimated product cost (b) Cost per unit (c) Price (d) Costing a Product In a manufacturing environment, cost of a product is made up of three components: Directs costs are also known as "traceable costs because they can be easily traced to a cost object Indirect costs cannot be traced to objects in a cost-effective manner. These are known as overhead costs. Allocation of these costs are done by computing a Predetermined Overhead Rate using estimates. Predetermined Overhead Rate What is another term for "cost driver? The overhead costs are applied to the cost of the product using the following formula: Predetermined OH Rate x Actual Usage of Cost Driver = Amount to Apply Here'a "Manufacturing Overhead" T-Account (an expense account that gets closed) MOH I 1 Overhead could be overapplied" or "underapplied": MOH 1 I MOH 1 I Problem 12-18 Allocation to accomplish smoothing Velez Corporation estimated its overhead costs would be $50,000 per month except for January when it pays the $30,000 annual insurance premium on the manufacturing facility. Accordingly, the January overhead costs were expected to be $80,000 ($30,000 + $50,000). The company expected to use 7,000 direct labor hours per month except during July, August, and September when the company expected 9.000 hours of direct labor each month to build inventories for high demand that normally occurs dur- ing the Christmas season. The company's actual direct labor hours were the same as the estimated hours. The company made 3,500 units of product in each month except July, August, and September, in which it produced 4,500 units each month. Direct labor costs were $30 per unit, and direct materials costs were $25 per unit. Required a Calculate a predetermined overhead rate based on direct labor hours. b. Determine the total allocated overhead cost for January, March, and August. c. Determine the cost per unit of product for January, March, and August d. Determine the selling price for the product, assuming that the company desires to earn a gross margin of $20 per unit. a. The items used to compute the predetermined overhead rate : Total Expected Overhead Costs = Total Expected Labor Hours = The rate is computed as follows: b. c. & d. January | March | August 7,000 7,000 9,000 3,500 3,500 4.$00 Direct labor hours Units produced Indirect cost cost cost Total estimated product cost (b) Cost per unit (c) Price (d)
