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...

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1) Precision Lens Company manufactures sophisticated lenses and mi
ors used in large
optical telescopes. The company is now preparing its annual profit plan. As part of its
analysis of the profitability of individual products, the controllable estimates the
amount of overhead that should be allocated to the individual product lines from the
following information.
Mi
ors Lenses
Units produced 30 30
Material moves per product line 4 16
Direct-labor hours per unit 250 250
The total budgeted material handling cost for the year is $90,000.
Required:
a. Under a costing system that allocates overhead on the basis of direct-labor
hours, the material handling costs allocated to one mi
or would be what
amount?
Total Labor Hours
Mi
ors 7,500 (30 X 250)
Lenses 7,500 (30 x 250)
Total 15,000
=====
Overhead rate $6.00 per labor hour ($90,000 / 15,000)
Overhead allocated to per Mi
or $1,500 ($6.00 x 250)
. Answer the same question as in requirement (1), but for lenses.
Total Labor Hours
Mi
ors 7,500 (30 X 250)
Lenses 7,500 (30 x 250)
Total 15,000
=====
Overhead rate $6.00 per labor hour ($90,000 / 15,000)
Overhead allocated to per Lenses $1,500 ($6.00 x 250)
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c. Under activity-based costing (ABC), the material-handling costs allocated to one
mi
or would be what amount? The cost driver for the material handling activity
is the number of material moves.
Total Material Moves
Mi
ors 120 (30 X 4)
Lenses 480 (30 x 16)
Total 600
=====
Overhead rate $150.00 per Material Move ($90,000 / 600)
Overhead allocated to per Mi
or $600 ($150 x 4)
d. Answer the same question as in requirement (c) above, but for one lens instead
of one mi
or.
Total Material Moves
Mi
ors 120 (30 X 4)
Lenses 480 (30 x 16)
Total 600
=====
Overhead rate $150.00 per Material Move ($90,000 / 600)
Overhead allocated to per Lenses $2,400 ($150 x 16)
e. Why is the cost allocated in (c) & (d) differ from cost allocated in (a) & (b)?
The difference between cost allocation under the method of direct labor hours and
material handling is change of allocation method.
Production of Mi
or and lenses takes same number of labor hours (250 hours per
unit), hence the allocation of overhead is same at $1,500 per unit.
Since Material handing cost should be divided as per the number of moves of material,
the other method gives more accurate overhead allocation per unit. Mi
or has only 4
moves, so its per unit overhead rate is $600. Whereas Lenses has 16 material moves
per unit, therefore it has overhead rate of $2,400 per unit.
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2) Clark &Schiffer LLP perform activities related to e-commerce consulting and
information systems in Vancouver, British Columbia. The firm, which bills $140 per
hour for services performed, is in a very tight local labor market and is having difficulty
finding quality help for its overworked professional staff. The cost per hour for
professional staff time is $50. Selected information follow:
 Billable hours to clients for the year totaled 6,000, consisting of: information
systems services, 3,600; e-commerce consulting, 2,400.
 Administrative cost of $381,760 was (and continues to be) allocated to both...