Precision Lens Company manufactures sophisticated lenses and

Precision Lens Company manufactures sophisticated lenses and mirrors used in large optical telescopes The company is now preparing its annual profit plan. As part of its analysis of the profitability of indi- vidual products, the controller estimates the amount of overhead that should be allocated to the individ- ual product lines from the following information. Lenses 30 16 250 Mirrors 30 Units produced... Material moves per product line Direct-labor hours per unit.... 250 The tofa budgeted material-handling cost is $90:000. Required: 1. Under a costing system that allocates overhead on the basis of direct-labor hours, the material- 2. Answer the same question as in requirement (1), but for lenses. 3. Under activity-based costing (ABC), the material-handling costs allocated to one mirror would be 4. Answer the same question as in requirement (3), but for lenses. (CMA, adapted) handling costs allocated to one mirror would be what amount? what amount? The cost driver for the material-handling activity is the number of material moves.

Solution

1) Material handling cost allocated to one mirror $      1,500 Working: Material handling costs $    90,000 Total direct labor hours (30*250)+(30*250) =        15,000 Cost per direct labor hour = $ 90,000 /        15,000 = $       6.00 Cost allocated to one mirror = Direct Labor hours*Cost per labor hour = 250*6.00 = $    1,500 2) Material handling cost allocated to one Lense $      1,500 Working: Material handling costs $    90,000 Total direct labor hours (30*250)+(30*250) =        15,000 Cost per direct labor hour = $ 90,000 /        15,000 = $       6.00 Cost allocated to one Lense = Direct Labor hours*Cost per labor hour = 250*6.00 = $    1,500 3) Material handling cost allocated to one mirror $          600 Working: Activity Rate = Overhead Cost/Total no. of activity driver = $ 90,000 / (4+16) = $    4,500 Cost allocated in total = $    4,500 x 4 = $ 18,000 Material handling cost allocated to one mirror = $    18,000 / 30 = $        600 4) Material handling cost allocated to one Lense $      2,400 Working: Activity Rate = Overhead Cost/Total no. of activity driver = $ 90,000 / (4+16) = $    4,500 Cost allocated in total = $    4,500 x 16 = $ 72,000 Material handling cost allocated to one Lense = $    72,000 / 30 = $    2,400