This answer results from dividing the total cost by the total number of shirts. Since T-shirts and V-neck shirts take twice as long to fold as an athletic shirt, a straight average does not provide a fair cost allocation. Instead, the total cost should be divided by the total standard number of seconds required to fold and package all of the shirts produced during the period to determine the standard cost per second, and that per second cost should be multiplied by the number of seconds needed to fold one T-shirt to get the standard cost folding and packaging for one T-short.
This answer results from allocating 40% of the total cost of $78,200 to the 50,000 T-shirts produced, then dividing that amount by 50,000 to get the allocated cost of one T-shirt. However, the 3 different types of shirts were produced in different quantities, and the T-shirts and V-neck shirts require a different amount of time to fold and package than the athletic shirts require. Instead, the total cost should be divided by the total standard number of seconds required to fold and package all of the shirts produced during the period to determine the standard cost per second, and that per second cost should be multiplied by the number of seconds needed to fold one T-shirt to get the standard cost folding and packaging for one T-short.
Operation costing is a hybrid, or combination, of job-order costing and process costing. In this method of costing, a company applies the basic operation of process costing to a production process that produces batches of items. These different batches follow a similar process, but the direct materials that are input to each batch are different. Examples of a system where this would be appropriate are clothing, furniture, shoes and similar items. As you can see, for each of these items, the general product is the same (for example, a shirt), but the materials that are used in each shirt may be different. In operation costing the direct materials are charged to the specific batch where they are used, but conversion costs are accumulated and distributed using a predetermined conversion cost per unit. These conversion costs are allocated by batch. The total standard time to fold and package each type of undershirt and the total for all the shirts was: T-shirts: 40 seconds × 50,000 shirts produced = 2,000,000 seconds V-neck shirts: 40 seconds × 30,000 shirts produced = 1,200,000 seconds Athletic shirts: 20 seconds × 20,000 shirts produced = 400,000 seconds Total time: 3,600,000 seconds The cost to be applied to each T-shirt is $78,200 divided by 3,600,000 seconds and multiplied by the standard number of seconds per T-shirt, which is 40 seconds. $78,200 ÷ 3,600,000 × 40 = $.8689 cost to be applied to each T-shirt.
This answer results from allocating 1/3 of the total cost of $78,200 to the 50,000 T-shirts produced, then dividing that amount by 50,000 to get the allocated cost of one T-shirt. However, the 3 different types of shirts were produced in different quantities, and the T-shirts and V-neck shirts require a different amount of time to fold and package than the athletic shirts require. Instead, the total cost should be divided by the total standard number of seconds required to fold and package all of the shirts produced during the period to determine the standard cost per second, and that per second cost should be multiplied by the number of seconds needed to fold one T-shirt to get the standard cost folding and packaging for one T-short.
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