In estimating the cost of a cost object, how are direct costs and indirect costs assigned to the cost object? Using the NGOs involved in the tsunami relief efforts (described in the 'Real life' titled 'Measuring tsunami recovery costs: an overhead or not?' in the section 'Allocating indirect costs: some general principles') choose a cost object and give two examples of direct and indirect costs for that cost object.

Eye in the Sky 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 individual products, the management accountant estimates the amount of overhead that should be allocated to the individual product lines from the following information:

                                                                                                          Mirrors            Lenses

Units produced                                                                                  60                     60

Material handling (number of moves) per product line                      8                     32

Direct labour hours per unit                                                              500                   500

 

The total budgeted material-handling cost is $180 000.

 

Required:

1. Calculate the material-handling costs allocated to one mirror under a costing system that allocates overhead on the basis of direct labour hours.

2. Calculate the material-handling costs allocated to one lens under a costing system that allocates overhead on the basis of direct labour hours.

3. Calculate the material-handling costs allocated to one mirror under activity-based costing. The activity driver for the material-handling activity is the number of material moves.

4. Calculate the material-handling costs allocated to one lens under activity-based costing.