Managerial Accounting

| November 18, 2015

Bill of Material Costing

The purpose of this exercise is to familiarize you with costing in a manufacturing environment. The tool often utilized is the cost indented bill of material or BOM to develop a product cost.

The bill of material is developed by design engineering and is structured to reflect how the product is to be assembled or manufactured.

Material cost may be obtained from a purchase history or price quotations.

Industrial engineering determines the labor standard or time required to make an assembly from time or methods studies. For example, .005 hours to assemble level 9 parts to make assembly 8 in the following bill of material. Wage rates may be obtained from collective bargaining agreements or from payroll records. A wage rate of $15 per hour multiplied by the assembly hours of .005 yields a labor cost of 7.5 cents of assembly labor.

Overhead is often a function of labor or utilizes labor as a driver. For example, an overhead rate may be 130% of labor cost or labor hours worked. The overhead calculation for the previous example would be 7.5 cents multiplied by 130% or overhead per assembly of 9.75 cents. Other drivers may be used for overhead calculations such as machine hours. Overhead rates are determined during the annual budgeting process.


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