201-Wk3-Product costing-S'12 (STUD)

# 201-Wk3-Product costing-S'12 (STUD) - Mgmt. 201 Managerial...

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Product costing – page 1 Mgmt. 201 – Managerial Accounting – Week 3 Cost Allocations Product Costing Systems Professor Lynda Thoman Product costing – page 2 In the last handout we talked about “applying” (adding) the manufacturing costs to the WIP inventory so we can keep track of all of the costs to manufacture the product. WIP Inventory – Applying the costs of the soccer balls + (2) \$30,000 – Direct material cost of rubber (6) \$142,333 – Total cost of the finished batch of soccer balls. Since 30,000 balls were made, the cost per ball is (3) \$45,000 – Direct labor cost (4) \$33,333 – OH depreciation cost (5) \$34,000 – OH utility cost \$142,333 \$142,333/30,000 = \$4.74 In that class, we only made one product, so it was easy to find the cost per soccer ball. No company makes just one product, so we need to learn a method to take all of the manufacturing costs that we have spent and divide it among the different products. We already know direct manufacturing costs will be traced to each type of product made (by definition of direct costs). How does a company divide the indirect or overhead costs?

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Product costing – page 3 Assigning manufacturing costs to several products. Caterpillar Inc. (also known as CAT) is “the world’s leading manufacturer of construction and mining equipment, diesel and natural gas engines, and industrial gas turbines. The company manufactures over 300 different types of machines from compactors to harvesters to excavators. Many of these machines are produced in the same factory, and CAT must determine the cost to manufacture each type of equipment. Why? We will focus on the costs of making just three types of machines: a gigantic earthmover, a medium sized tractor and a small loader. We need to take all of the manufacturing costs assign them to the three product lines. Product costing – page 4 In Chapter 3 we will: I. Learn about allocating indirect costs: why it is done and how it is done. Examine the cost allocation issue by looking at two problems: i. How can friends sharing an apartment assign their common food costs to each person? (THE FOOD PROBLEM) ii. How does Caterpillar assign its overhead costs to the different types of machinery that it makes? (THE CATERPILLAR INC. PROBLEM) II. Study “normal” costing or using an “estimate” of the costs to determine the cost of a product. III. Work some additional problems
Product costing – page 5 I. Allocating costs – The hows and whys. THE FOOD PROBLEM - Background Four friends--Betty, Jose, Ebony and Cecil--rent an apartment together. While each has a busy and varied schedule, at meal times everyone in the apartment eats and cooks together. Whenever someone purchases food, that person writes her/his name on the receipt and puts the

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## This note was uploaded on 02/23/2012 for the course MGMT 201 taught by Professor Rowe during the Spring '08 term at Purdue University.

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201-Wk3-Product costing-S'12 (STUD) - Mgmt. 201 Managerial...

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