Question
In: Accounting
What is your cost object (5pts)? (Do not define cost object; please write down the item...
What is your cost object (5pts)? (Do not define cost object;
please write down the item or service that you want to produce and
sell)
b) What is the Direct Material of your product or service
(5pts)?
c) What are the overhead costs of your product or service (5
pts)?
d) Assume that you would like to assign overhead costs to your
product or service. Which method you would prefer to use for
assigning overhead cost to your product or service (In other words,
how do you allocate overhead costs to your product or service) (5
pts)? Why (Please explain the reason of your selection) (5
pts)?
e) Shall we add “the insurance cost of cars used in marketing
department” to the cost of your product or service? If not, Why (5
pts)?
Solutions
Expert Solution
Let us take an example of a Soap Manufacturing Company, engaged in the manufacture of detergents, bathing soaps, shampoo and dishwashing liquid.
a) The cost sheet presented hereunder shall give a better understanding of the concepts of cost of a manufacturing firm distributed among the different product lines (Cost Items/ Cost Centers).
| Cost Sheet of Soap Manufacturing Company Ltd. | ||||||
| Particulars | Total Amount | Detergents | Bathing Soaps | Shampoo | Dishwashing Liquid | |
| Direct Material: | ||||||
| Acid | $ 500,000 | $ 150,000 | $ 150,000 | $ 100,000 | $ 100,000 | |
| Chemicals | $ 1,200,000 | $ 400,000 | $ 250,000 | $ 200,000 | $ 350,000 | |
| Oils | $ 250,000 | $ 25,000 | $ 50,000 | $ 100,000 | $ 75,000 | |
| Perfume | $ 50,000 | $ 3,000 | $ 20,000 | $ 20,000 | $ 7,000 | |
| Total | $ 2,000,000 | $ 578,000 | $ 470,000 | $ 420,000 | $ 532,000 | |
| Direct Labor | $ 800,000 | $ 150,000 | $ 225,000 | $ 200,000 | $ 225,000 | |
| Direct Expenses | $ 400,000 | $ 75,000 | $ 115,000 | $ 100,000 | $ 110,000 | |
| Prime Cost | $ 3,200,000 | $ 803,000 | $ 810,000 | $ 720,000 | $ 867,000 | |
| Factory Overheads | ||||||
| Fixed: | Depriciation | $ 250,000 | $ 50,000 | $ 87,500 | $ 62,500 | $ 50,000 |
| Rent | $ 300,000 | $ 60,000 | $ 105,000 | $ 75,000 | $ 60,000 | |
| Power | $ 200,000 | $ 40,000 | $ 70,000 | $ 50,000 | $ 40,000 | |
| Insurance | $ 50,000 | $ 10,000 | $ 17,500 | $ 12,500 | $ 10,000 | |
| Supervisor's Salary | $ 150,000 | $ 30,000 | $ 52,500 | $ 37,500 | $ 30,000 | |
| Variable: | Electricity | $ 60,000 | $ 12,000 | $ 21,000 | $ 15,000 | $ 12,000 |
| Running Expense of Machine | $ 120,000 | $ 24,000 | $ 42,000 | $ 30,000 | $ 24,000 | |
| Work Cost / Factory Cost | $ 4,330,000 | $ 866,000 | $ 1,515,500 | $ 1,082,500 | $ 866,000 | |
| Office Overheads | $ - | $ - | $ - | $ - | ||
| Fixed: | Rent | $ 120,000 | $ 24,000 | $ 42,000 | $ 30,000 | $ 24,000 |
| Variable: | Labour | $ 150,000 | $ 30,000 | $ 52,500 | $ 37,500 | $ 30,000 |
| Electricity | $ 30,000 | $ 6,000 | $ 10,500 | $ 7,500 | $ 6,000 | |
| Others | $ 25,000 | $ 5,000 | $ 8,750 | $ 6,250 | $ 5,000 | |
| Cost of Production | $ 4,655,000 | $ 931,000 | $ 1,629,250 | $ 1,163,750 | $ 931,000 | |
| Opening Stock of Finished Goods | $ 150,000 | $ 30,000 | $ 52,500 | $ 37,500 | $ 30,000 | |
| Less: Closing Stock of Finished Goods | $ 120,000 | $ 24,000 | $ 42,000 | $ 30,000 | $ 24,000 | |
| Cost Of Goods Sold | $ 4,685,000 | $ 937,000 | $ 1,639,750 | $ 1,171,250 | $ 937,000 | |
| Selling and Distribution Overheads | $ - | $ - | $ - | $ - | ||
| Advertisement | $ 60,000 | $ 12,000 | $ 21,000 | $ 15,000 | $ 12,000 | |
| Packaging | $ 30,000 | $ 6,000 | $ 10,500 | $ 7,500 | $ 6,000 | |
| Cost of Sales / Total Cost | $ 4,775,000 | $ 955,000 | $ 1,671,250 | $ 1,193,750 | $ 955,000 | |
| Profit |
$
725,000<
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