Simple costing system using a single indirect cost pool

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Plastim has historically had a simple costing system that allocates indirect costs using a single indirect-cost rate, . We calculate budgeted costs for each type of lens in 2011 using Plastim’s simple costing system and later contrast it with activity-based costing.  Exhibit 5-1 shows an overview of Plastim’s simple costing system. Use this exhibit as a guide as you study the following steps, each of which is marked in Exhibit 5-1.
 

Step 1: Identify the Products That Are the Chosen Cost Objects. The cost objects are the 60,000 simple S3 lenses and the 15,000 complex CL5 lenses that Plastim will produce in 2011. Plastim’s goal is to first calculate the total costs and then the unit cost of designing,manufacturing, and distributing these lenses.
 

Step 2: Identify the Direct Costs of the Products. Plastim identifies the direct costs direct materials and direct manufacturing labor of the lenses. Exhibit 5-2 shows the direct and indirect costs for the S3 and the CL5 lenses using the simple costing system. The direct cost calculations appear on lines 5, 6, and 7 of Exhibit 5-2. Plastim classifies allother costs as indirect costs.
 

Step 3: Select the Cost-Allocation Bases to Use for Allocating Indirect (or Overhead) Costs to the Products. A majority of the indirect costs consist of salaries paid to supervisors, engineers, manufacturing support, and maintenance staff, all supporting direct manufacturing labor. Plastim uses direct manufacturing labor-hours as the only allocation base to allocate all manufacturing and nonmanufacturing indirect costs to S3 and CL5. In 2011, Plastim plans to use 39,750 direct manufacturing labor-hours.

Step 4: Identify the Indirect Costs Associated with Each Cost-Allocation Base. Because Plastim uses only a single cost-allocation base, Plastim groups all budgeted indirect costs of $2,385,000 for 2011 into a single overhead cost pool.

Step 5: Compute the Rate per Unit of Each Cost-Allocation Base

Step 6: Compute the Indirect Costs Allocated to the Products. Plastim expects to use 30,000 total direct manufacturing labor-hours to make the 60,000 S3 lenses and 9,750 total direct manufacturing labor-hours to make the 15,000 CL5 lenses. Exhibit 5-2 shows indirect costs of $1,800,000 ($60 per direct manufacturing labor-hour 30,000 direct manufacturing labor-hours) allocated to the simple lens and $585,000 ($60 per direct manufacturing labor-hour 9,750 direct manufacturing labor-hours) allocated to thecomplex lens.
 

Step 7: Compute the Total Cost of the Products by Adding All Direct and Indirect Costs Assigned to the Products. Exhibit 5-2 presents the product costs for the simple and complex lenses. The direct costs are calculated in Step 2 and the indirect costs in Step 6. Be sure you see the parallel between the simple costing system overview diagram (Exhibit 5-1)

and the costs calculated in Step 7. Exhibit 5-1 shows two direct-cost categories and one indirect-cost category. Hence, the budgeted cost of each type of lens in Step 7 (Exhibit 5-2) has three line items: two for direct costs and one for allocated indirect costs. The budgeted cost per S3 lens is $58.75, well above the $53 selling price quoted by Bandix. The budgeted cost per CL5 lens is $97.

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