Question

I get stuck when I have to calculate the cost of each activity. Then calculating the HT cost per test hour and ST cost per hour. Please help and show work!

Maynard Test Laboratories does heat testing (HT) and stress testing (ST) on materials and operates at capacity. Under its current simple costing system, Maynard aggregates all operating costs of $975,000 into a single overhead cost pool. Maynard calculates a rate per test-hour of $13 ($975,000/75,000 total test-hours). HT uses 55,000 test-hours, and ST uses 20,000 test-hours. Gary Lawler, Maynard'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 Maynard to lose business. Lawler divides Maynard'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 Data Table 0 Requirements a. Direct-labor costs, $217,000. These costs can be directly traced to HT, $165,000, and ST, S52.000. b. Equipment-related costs (rent, maintenance, energy, and so on). $375,000. These costs are allocated to HT and ST on the basis of test-hours. c. Setup costs, $375,000. These costs are allocated to HT and ST on the basis of the number of setup-hours required. HT requires 10,000 setup-hours, and ST requires 5,000 setup-hours. d. Costs of designing tests, $248,000. These costs are allocated to HT and ST on the basis of the time required to design the tests. HT requires 2.000 hours, and ST requires 2.000 hours. 1. Classify each activity cost as output unit-level, batch- level, product or service-sustaining, or facility-sustaining. Explain each answer. 2. Calculate the cost per test-hour for HT and ST. Explain briefly the reasons why these numbers differ from the $13 per test-hour that Maynard calculated using its simple costing system. 3. Explain the accuracy of the product costs calculated using the simple costing system and the ABC system. How might Maynard's management use the cost hierarchy and ABC information to better manage its business? Print Done Print Done

Answer 1

Answer with working notes is given below

Cost item Direct Labor Equipment related cost Set ups costs Costs of designing tests Cost type Output unit - level Output unit - level Batch - level Service - sustaining cost Activity Equipment related cost Set ups costs Costs of designing tests Total Overheads $375,000 $375,000 $248,000 $998,000 Total Activity rate Activities 75,000 $5.00 Per test hour 15,000 $25.00 per set up 4,000 $62.00 per design hour Cost activity rate Activities used Allocated Cost Activity HT Equipment related cost Set ups costs Costs of designing tests $5.00 $25.00 $62.00 55,000 10,000 2,000 Total Overheads ST 20,000 5,000 2,000 HT ST $275,000 $100,000 $250,000 $125,000 $124,000 $124,000 $649,000 $349,000 Direct Labor Equipment related cost Set ups costs Costs of designing tests Total Cost HT Total Cost Per labor hour Total Cost Per labor hour $165,000 $3.00 $52,000 $2.60 $275,000 $5.00 $100,000 $5.00 $250,000 $4.55 $125,000 $6.25 $124,000 $2.25 $124,000 $6.20 $814,000 $14.80 $401,000 $20.05 Allocation of overhead as per test hour method does not correlate the cost with activities consumed ABC costing method is more realistic way of allocating overhead costs to products ABC method should be used because -It helps in accurate product costing - It helps in Product pricing - It helps in better cost management through cost control and cost reduction