Determine the Cost to Make One Product
Things You Must Know
Introduction to Accounting
Cost Sheet: A detail listing of what is estimated to be required and what it is
estimated to cost to make one product or provide one service.
The cost sheet is the budget/estimate/expected:
1) quantity required to make one unit
2) cost of one quantity
3) total cost for each type of cost to make one unit of product (direct material, direct labor, manufacturing overhead)
The cost sheet is an estimate and consists of budget amounts. The budget amounts are often called “standards”.
A standard is the amount you expect to pay and the quantity you expect to use to make one product. The standard is for one.
Quantity Standard: how much is expected to be used to make one product
Cost (Price) Standard: how much is expected to be paid for one quantity
The cost sheet provides the following related to ONE product or service:
1) The different types of direct material required
2) The quantity of each type of direct material required
3) The cost for one quantity of each material required
1) Each different type of direct labor required
2) Hours required for each labor type to make one
3) The cost per hour that is paid for each type of labor
1) The activity the company does that causes the company to incur the majority of manufacturing overhead costs
2) The quantity of the activity required to make one product
3) The average cost of doing the activity each time it is done (the pre-determined manufacturing overhead rate)
The cost sheet states the quantity and cost for each different type of product cost (DM, DL, MOH):
Quantity Required x Cost for 1 Quantity = Total Cost
The estimated quantity of direct materials required to make the product is determined by looking at the product or reviewing the design specifications.
The estimated cost for one quantity is determined by what is currently paid and the direction the cost is trending.
The purchasing department is responsible for maintaining adequate supply of direct materials and purchasing the highest quality materials at the lowest cost.
The production manager and supervisors are responsible for the quantity used and minimizing waste.
The production manager determines the steps required to produce one unit of product.
The amount of time it is expected to take is determined by monitoring the average time required to complete production of one unit.
The production manager and supervisors are responsible for labor efficiency.
Employees with different skill levels are paid different amounts per hour.
The human resource manager works with the production manager to hire qualified labor at the lowest cost per hour.
The amount of manufacturing overhead required to make one product is not something that can be seen going directly into or touching the product as it is manufactured.
The actual amount of manufacturing overhead cost incurred to make each product can not be determined by watching the product being made.
A “pre-determined overhead rate” is used to determine the amount of manufacturing overhead cost to allocate to each (one) product.
The managerial accountant determines the production activity that causes the company to incur the majority of manufacturing overhead costs.
This activity is used to allocate manufacturing overhead costs to individual products.
Allocate manufacturing overhead costs to one product:
1) Determine the manufacturing activity that causes the company to incur the majority of the overhead dollars.
2) Determine how much of this activity it takes to make one product and the total quantity of the activity required for the year to manufacture all products.
Quantity of the overhead activity required to make 1
x Estimated total units to manufacture during the year
= Total estimated annual activity
3) Compute the pre-determined manufacturing overhead rate:
Rate = Total Estimated Annual Manufacturing Overhead Dollars
Total Estimated Annual Activity (from step 2)
4) Determine the cost of manufacturing overhead incurred to make one product:
Pre-determined manufacturing overhead rate (from step 3)
x Quantity of activity required to manufacture one product (from step 2)
= The manufacturing overhead cost to make one product.
Using the Cost Sheet
The cost sheet is an estimate (budget, standard) of what it costs to make one product or provide one service. The cost sheet is used to:
1) price the product or service
2) determine the quantity of material purchased
3) monitor the cost of materials purchased and the quantity used
4) determine how many employees with different skill levels are needed
5) monitor the efficiency of direct labor
6) compare actual product costs to budget and take corrective action