You are on page 1of 2

# Unit Cost Under Traditional Costing Method

Introduction:
The main difference between Traditional Costing and Activity Based Costing is that there is a difference in how overhead is calculated because of cost drivers. Before the age of machines and computers the cost of overhead was driven by human labor. Companies had large labor forces that did all of the work by hand. For a while manufacturing cost were driven by machines as manufacturing changed over to large equipment with far fewer operators. As America is becoming more of a service industry driven country, it is moving back to overhead cost being driving by labor once more.

Example problem:
Bright and Shiny Dog Collars Manufacturing manufactures its own lines of dog and cat collars to be sold to retailers. It has two product lines at present. They are Simple Collars and Jeweled Collars. Direct materials are .50 for simple collars and \$10 for jeweled collars per unit. Direct labor cost are \$3.50 for simple collars and \$7.00 for jeweled collars. Overhead cost is based on labor cost. The projected overhead for this year is \$10,000 and the total expected labor cost is expected to be \$5,250.

Instructions:
Determine the product cost for each line for Bright and Shiny Dog Collars Manufacturing.

Step 1. Predetermined overhead rate for labor cost is: Estimated Overhead / Expected Labor Cost = Overhead Rate in percent \$10,000 / 5,250 = 1.904761904761905 X 100 = 190.4761907761905 Round 190%

Revised 1/2014 MJC

Page 1

Unit Cost Under Traditional Costing Method

Product Cost Simple Collar Jeweled Collar Direct Material .50 10.00 Direct Labor 3.50 7.00 Manufacturing Overhead 6.65 13.30 Total Unit Cost 10.65 30.50

Step 2. The direct material and direct labor cost were given in the problem. Step 3. Manufacturing Overhead Cost Calculations: Simple Collar: direct labor cost X predetermined overhead rate. 3.50 X 190% = \$10.65 Jeweled Collar: direct labor cost X predetermined overhead rate. 7.00 X 190% = \$13.30 Step 4. Total all the cost down to get the product cost for one collar in each product line.

Revised 1/2014 MJC

Page 2