Product Costing Levi’s Company

PRODUCT COSTING : Levi’s COMPANY

The Levi’s apparel company in San Francisco, America makes jeans and premium chinos. Each product line has its own assembly line on the factory floor. Overhead costs for the factory for 2005 were $3,300,000. 500,000 jeans and 400,000 chinos were produced during the year. 500,000 direct labor hours were used: 200,000 for jeans, and 300,000 for chinos. The average direct labor wage rate was the same on both assembly lines, and was $14 per hour. Denim fabric is used to make jeans, and chinos are made from a cotton twill fabric. Overhead is allocated using direct labor hours.

The overhead to work-in-process is based on an overhead rate calculated as follows.

$3,300,000 ÷ 500,000 direct labor hours = $6.60 per direct labor hour.

The factory would track costs by batch, or perhaps weekly, but to simplify our example, we record only one journal entry for each type of transaction. We also make the unrealistic assumption that there is no work-in-process at the end of the period. To focus the presentation on inventory-related accounts, T-accounts for some non-inventory accounts, and the entry to debit accounts receivable and credit revenue, are omitted.

(1) Raw Materials: denim fabric $3,000,000

Raw Materials: cotton twill 2,250,000

Accounts Payable $5,250,000

(To record the purchase of 600,000 yards of denim fabric at $5.00 per yard, and 500,000 yards of cotton twill fabric at $4.50 per yard.)

(2) Work-in-process: Jeans $2,500,000

Raw Materials: denim fabric $2,500,000

(To record materials requisitions for 500,000 yards, for the movement of denim from the receiving department to the cutting room.)

(3) Work-in-process: Chinos $2,160,000

Raw Materials: cotton twill $2,160,000

(To record materials requisitions for 480,000 yards, for the movement of cotton twill from the receiving department to the cutting room.)

(4) Work-in-process: Jeans $2,800,000...