From the course: Accounting Foundations: Cost-Based Pricing Strategies
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What is the "cost" to make one shirt?
From the course: Accounting Foundations: Cost-Based Pricing Strategies
What is the "cost" to make one shirt?
- We made 600,000 shirts during the year. We also made several hundred thousand pairs of pants. The total product cost was $4,050,000. What we want to know is how much it cost to produce one shirt. This $4,050,000 in product cost is composed of three elements, direct materials cost, direct labor cost, and manufacturing overhead. In this example, specifically identifying the cost of materials associated with making shirts is easy. We have these detailed data. So the materials cost to make 600,000 shirts was $350,000. How about direct labor? Well, we have these data. It looks like 40% of the worker hours was spent on shirts, and 60% on pants. The total direct labor cost was $500,000. If we make the reasonable assumption that shirt workers and pants workers get paid the same wage rate, then the direct labor cost associated with making 600,000 shirts was $200,000 which is $500,000 multiplied by 40%. So here's where we…
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