Question

Hopkinton Test Laboratories does heat testing (HT) and stress testing (ST) on materials and operates at capacity. Under its current simple costing system, Hopkinton aggregates all operating costs of $1,200,000 into a single overhead cost pool. Hopkinton calculates a rate per test-hour of $16 ($1,200,000/75,000 total test-hours). HT uses 50,000 test-hours, and ST uses 25,000 test-hours. Gary O'Loughlin, Hopkinton's controller, believes that there is enough variation in test procedures and cost structures to establish separate costing and billing rates for HT and ST. The market for test services is becoming competitive. Without this information, any miscosting and mispricing of its services could cause Hopkinton to lose business. O'Loughlin divides Hopkinton's costs into four activity-cost categories. (Click the icon to view the activity-cost categories.) Read the requirements. Requirement 1. Classify each activity cost as output unit-level, batch-level, product or service-sustaining, or facility-sustaining. Explain each answer Cost Item Cost-type a. Direct labor b. Equipment-related costs (rent, maintenance, energy, etc.) c. Setup costs d. Costs of designing tests Output unit-level costs are Batch-level costs are Servico-sustaining costs are Facility-sustaining costs are Choose from any list or enter any number in the input fields and then continue to the next question. The overhon rates under the new activ

Answer 1

req. 1

	Cost-item	Cost-type
a	Direct labor	Output unit level cost
b	Equipment-related cost (rent, maintenance, energy, etc.)	Output unit level cost
c	Setup cost	Batch level costs
d	Costs of designing tests	Service sustaining costs

Output unit level cost are	Incurred for every hour of testing of material
Batch-level cost are	incurred for a batch of setup regardless of number of hours of test time
Service sustaining cost are	incurred to desighn irrespective of number of batches tested or hours of test time.

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Req2.

Working as follows:

Compute:

Test per hour = $450,000 $\div$   (50,000 + 25,000) hours

= $6 per test hour

Setup per hour = $425,000 $\div$ (12,000 + 5,000) setup hours

= $25 per setup-hour

Designing test per hour = $270,000 $\div$ (2,500 + 2,000) hours

= $60 per hour

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	Heat Testing		Stress Testing
	Total	Per hour	Total	Per hour
	(A)	(B = A/50,000)	(C)	(D = C/25,000)
Direct labor cost	$75,000	$1.50	$30,000	$1.20
Equipment related costs:
$6 per hour × 50,000 hours	$300,000	$6
$6 per hour × 25,000 hours			$150,000	$6
Setup cost:
$25 per setup-hour × 12,000 setup -hours	$300,000	$6
$25 per setup-hour × 5,000 setup -hours			$125,000	$5
Designing cost:
$60 per hour × 2500 hours	$150,000	$3
$60 per hour × 2000 hours			$120,000	$4.80
Total Cost	$825,000	$17	$425,000	$17.00

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Req3.

ABC system uses better identifies the resource needed for heat testing and stress testing as it captures all the various undertaken when performing the tests and recognizes the levels of the cost hierarchy at which cost differs. therefore ABC displays more accurate product costs.