Determine the Cost to Make One Product

Practice As You Learn

Steps to Prepare a Cost Sheet:

Include only product costs on the cost sheet:

Direct Materials
Direct Labor,
Variable Manufacturing Overhead
Fixed Manufacturing Overhead

Include only estimated costs.
Identify the following for ONE product or service:

Direct Materials:

1) The different types of direct material required
2) The quantity of each type of material required for one
3) The cost for one quantity of each material required

Direct Labor:

1) Each different type of direct labor required
2) Hours required for each type of labor to make one
3) The cost per hour that is paid for each type of labor

Manufacturing Overhead:

1) The activity the company does that causes the company to incur the majority of manufacturing overhead costs
2) The quantity of activity required to make one product
3) The total quantity of the activity required to make all products

 

Quantity of the overhead activity required to make 1
x Estimated total units to manufacture during the year
= Total estimated annual activity

4) Compute the average cost of doing the activity each time it is done; the pre-determined manufacturing overhead rate:

Total Estimated Annual Manufacturing Overhead Dollars
Total Estimated Annual Activity (from step 3)

The cost sheet states the quantity and cost for each item required for each product cost.

Quantity Required
x
Cost for 1 Quantity
=
Total Cost for 1
DM 1
DM 2
Total DM
DL 1
DL 2
Total DL
VOH
of Activity
x
Pre-determined O/H rate
MOH
of Activity
x
Pre-determined O/H rate
Total Cost

You must state a quantity, a cost for 1 quantity and the total cost for each.
Total cost only is not useful information for planning and analysis.

Practice as You Learn Problem:

A company manufactures plastic lead pencils. The plastic parts are placed in a machine that assembles the pencils. The machine can make 400 pencils per hour.

The estimated cost of the direct materials required for the pencils are as follows:

Pencil cylinder $0.06 for 1
Pencil Eraser$0.02 for 1
Pencil Tip $0.01 for 1
Lead for the Pencil $0.004 for 1

The machine operator that puts the materials into the machine and runs the machine is expected to be paid $17 per hour. Each pencil has 20 pieces of lead.

The company expects to make 1,500,000 pencils this year and fixed manufacturing overhead costs are estimated to be $65,000 and variable manufacturing overhead costs are estimated to be $25,000.

Manufacturing overhead is allocated to one pencil based on machine hours used to make the pencils.

Prepare a cost sheet for 1 pencil in proper format (round to 4 decimals):

Answer

Practice as You Learn Problem:

Step 1) Identify all the types of direct materials required to make the pencils and list them on the cost sheet, stating the quantity for one and cost for one quantity.

Step 2) Determine how many direct labor hours it requires to make one pencil.

Unless you are told otherwise, it requires labor to run the machine and direct labor hours will be the same as machine hours when a machine is making the product.

If a machine can do 400 per hour, then 1 / 400 is required for one.

1 / 400 = 0.0025 hours to do one pencil

Direct labor is required to run the machine and machine hours is also direct labor hours required

Important: When the cost is “per hour”, the quantity must be in hours.

The quantity must always be consistent with the cost per.

Place the quantity and cost for one of the quantity on the cost sheet.

 

Step 3) Determine the activity that is used to allocate manufacturing overhead. This is given in the problem as machine hours.

Step 4) Determine the total manufacturing overhead activity that is required to make all products:

Quantity of the overhead activity required to make 1          0.0025
x Estimated total units to manufacture during the year      x 1,500,000
= Total estimated annual activity                                             = 3,750

 

Step 5) Determine the pre-determined manufacturing overhead rate. Do two rates only when information is given for both fixed and variable costs.

Variable
Rate = Total Estimated Annual M O/H Dollars               $25,000 = $6.67
Total Estimated Annual M O/H Activity                              3,750

Fixed
Rate = Total Estimated Annual M O/H Dollars               $65,000 = $17.33

          Total Estimated Annual M O/H Activity                 3,750

The manufacturing O/H rate is per machine hour
The quantity put on the cost sheet is machine hours for one

Important: Do not divide the total cost by total units.

Manufacturing O/H is not allocated based on units made.
It is allocated based on machine hours

Step 6) Make sure the cost sheet is in proper format. Do not put any extra calculations on the cost sheet.

 

Cost Sheet for One Pencil

Quantity x Cost for One = Total Cost
Direct Material
Pencil Cylinder 1
x
$0.06
=
$0.06
Pencil Eraser 1
x
$0.02
=
$0.02
Pencil Tip 1
x
$0.01
=
$0.01
Lead 20
x
$0.004
=
$0.08
     Total Direct Materials         $0.17
Direct Labor
     Machine Operator 0.0025 hours
x
$17.00
=
$0.0425
Manufacturing O/H
     Variable 0.0025 hours
x
$6.67
=
$0.0167
     Fixed 0.0025 hours
x
$17.33
=
$0.0433

Total Cost

Total Cost

       

$0.2725

$0.485