Question

Assume that you would like to invest in a company.Required:a)What is your cost object? (Do not define cost object; please write down the item or service that you want to produce and sell)b)What is the Direct Materialof your product or service?c)What are the overhead costs of your product or service?d)Assume that you would liketo assign overhead costs to your product or service. Which method you would prefer to use for assigning overhead costto your product or service(In other words,how do you allocate overhead costs to your product or service) ? Why (Please explain the reason of your selection)?e)Shall we add “the insurance cost of cars used in marketing department” to the cost of your product or service? If not, Why?

Answer 1

Investing in a company manufacturing detergent powder

1. Cost object is the product being manufactured. So in this case it is detergent powder.
2. Direct material cost is the material directly consumed in production of the product.   

For example in Detergent power materials used is Soda ash, speckles, Dolomite, chemicals, etc

3. Overhead costs

• Indirect materials
• Indirect labor
• Repairs and maintenance
• Building and Equipment depreciation
• Property taxes
• Factory utilities
• Plant insurance

4. Machine hour method is the method used for allocation of overhead costs to the product. The reason being the plant is automated and manufacturing is done through machines. Hence a machine hour is the appropriate cost driver for allocation of overheads to product being manufacture
5. Insurance cost of cars used in marketing department shall be added to selling expenses. It is not manufacturing overhead cost and hence not part of product cost