Product Costing
Allocating and apportioning overheads to determine the total cost of a product or service.
TL;DR:Product Costing is the process of determining the total cost of making a single product or providing a service. Students learn to track Direct Costs (Prime Cost) and then tackle the more complex task of allocating and apportioning Indirect Costs (Overheads). This is a vital skill for any business to ensure they are pricing their products profitably.
About This Topic
Product Costing is the process of determining the total cost of making a single product or providing a service. Students learn to track Direct Costs (Prime Cost) and then tackle the more complex task of allocating and apportioning Indirect Costs (Overheads). This is a vital skill for any business to ensure they are pricing their products profitably.
The core of this topic is the 'Overhead Absorption Rate' (OAR). Students must learn how to fairly share out general factory costs, like heat and light, across different departments based on floor area, machine hours, or labor hours. This topic comes alive when students can physically model the apportionment process and debate the 'fairest' way to share costs through collaborative problem-solving.
Key Questions
- How are direct and indirect costs assigned to products?
- What are the bases for apportioning overheads?
- How is an overhead absorption rate calculated?
Watch Out for These Misconceptions
Common MisconceptionOverheads are just 'extra' costs that don't really matter.
What to Teach Instead
Overheads can often be the largest part of a product's cost. Peer discussion about the 'hidden' costs of running a famous Irish brand (like marketing and factory insurance) helps students see their importance.
Common MisconceptionYou can use any basis for apportionment.
What to Teach Instead
The basis must be logical; for example, you can't use 'floor area' to apportion 'canteen costs' if one department has twice as many people in a smaller space. The 'Apportionment Map' activity helps students find the most logical links.
Active Learning Ideas
See all activities→Inquiry Circle
The Apportionment Map
Groups are given a factory floor plan and a list of overheads (Rent, Insurance, Canteen costs). They must decide which 'basis' (e.g., area, number of employees) is best for apportioning each cost and perform the calculations.
Think-Pair-Share
Choosing the OAR
Students are given a scenario with a machine-intensive department and a labor-intensive department. They must pair up to decide whether to use a 'Machine Hour' or 'Labor Hour' absorption rate for each and justify their choice.
Simulation Game
The Total Cost Build
Using 'cost cards' (Materials, Labor, Apportioned Overheads), students must physically assemble the 'Total Cost' of a product, ensuring they include a percentage for profit to reach the final 'Selling Price.'