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Chapter 5
Product Costing Example
Suppose Fitter wants to update standard costs for its NRG-A bars. By analyzing the
company’s recent indirect costs related to the products produced, Fitter’s cost accountants
have calculated new overhead rates. Because the material costs are much larger than
direct labor costs at Fitter, the company has decided to apply production overhead as a
percentage of direct material costs. The new rate for production overhead is 100 percent
130 of direct material costs.
Figure 5-8 shows the product cost analysis for the NRG-A bar. The cost analysis is
based on seven cases of bars, which is the amount of bars that can be produced by a 500-
pound batch of dough. The recipe for a 500-pound batch of NRG-A bars was shown in
Figure 4-16 in Chapter 4. This information is repeated in the cost analysis of Figure 5-8,
along with the per-unit cost of each of these materials.

NRG-A Bar Product Cost Analysis (7 cases)
Direct
Unit of Cost per unit material
Ingredient measure NRG-A of measure cost
Oats lb 300 $0.20 $60.00
Wheat germ lb 50 50 $0.30 $15.00
Cinnamon lb 5 $3.00 $15.00
Nutmeg lb 2 2 $4.50 $9.00
Cloves lb 1 $5.50 $5.50
Honey gal 10 10 $6.40 $64.00
Canola gal 7 $1.70 $11.90
Vit./min. powder lb 5 5 $18.45 $92.25
Carob chips lb 50 $2.10 $105.00
Raisins lb 50 $3.20 $160.00
Total direct material cost $537.65
Production overhead cost $537.65
(100% of Total direct material)
Direct labor 54.50
Cost of goods manufactured 1,129.80
(COGM)
Sales and administrative costs
(30% of COGM) 338.94
Cost of goods sold (COGS) 1,468.74

COGM per case $161.40
COGS per case $209.82
Source Line: Course Technology/Cengage Learning.

FIGURE 5-8 Product cost analysis for NRG-A bar

For example, the per-pound cost of oats is $0.20. Multiplying the quantity of materials
by the unit cost gives the direct material cost for that ingredient item; therefore, the total
direct material cost of oats is $60.00 (300 × $0.20). Summing the results for all of the

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