Handy Headphones: Calculating Total Cost Per Headphone
How can we determine the total cost per headphone for Handy Headphones?
What are the steps involved in allocating, apportioning, and calculating the overhead costs for production departments? How are direct costs and overhead costs accounted for in the total cost per unit?
Calculating Total Cost Per Headphone for Handy Headphones
To determine the total cost per headphone, allocate and apportion all overheads to production departments, add direct costs, then divide by the number of units produced. This information is recorded on a standard cost card showing materials, labor, and overhead costs per unit.
Handy Headphones is an Irish company known for manufacturing lightweight, flexible, Bluetooth-enabled, and waterproof headphones, popular among those who enjoy music in the shower or while swimming. The production process involves five stages: moulding, wiring, IT, polishing, and packaging departments, along with two service departments - the canteen and maintenance.
The forecast figures for 2020 show various costs like factory rent, direct materials, direct labor, and expenses. To calculate the total cost per headphone, we need to allocate direct costs and apportion overhead costs to production departments based on specific criteria.
Allocation and apportionment of costs involve assigning direct costs like materials and labor directly to the product. Overhead costs such as factory rent, electricity, and maintenance machinery need to be apportioned based on suitable bases like area, machine value, or number of staff.
After allocating and apportioning costs, service department costs from the canteen and maintenance need to be re-apportioned to production departments. Once all costs are distributed, the total cost per headphone can be calculated by dividing the total cost by the number of units produced.
This detailed cost analysis is essential for the management accountant to make informed decisions about pricing strategies, profitability, and cost control. The standard cost card represents the breakdown of direct materials, labor, and overhead costs per unit, providing a comprehensive view of the cost structure for Handy Headphones.