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 $1,300,000 into a single overhead cost pool. Hopkinton calculates a rate per test-hour of S13 ($1,300,000 / 100,000 total test-hours). HT uses 60,000 test-hours, and ST uses 40,000 test-hours. Gary Celeste, 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. Celeste divides Hopkinton's costs into four activity-cost categories. (Click the icon to view the activity-cost categories.) Read the requirements Output unit-level costs are related to the number of units tested; required for each unit tested Batch-level costs are related to a group of units of the service. They are not related to the number of units tested. Service-sustaining costs are costs used to support individual services regardless of the number of units or batches tested. Facility-sustaining costs are costs that can not be traced to individual services but support the company as a whole. Requirement 2. Calculate the cost per test-hour for HT and ST. Explain briefly the reasons why these numbers differ from the S13 per test-hour that Hopkinton calculated using its simple costing system. First, determine the formula used to calculate the cost for each activity in each test type Data Table Activity rate Activity hours per test type Cost per activity - X Х = Calculate the cost of each activity and the total cost of the heat testing and stress testing Heat Test (HT) Total i Requirements b. Cost C. Direct labor Equipment Direct-labor costs, S243,000. These costs can be directly traced to HT, $183,000, and ST, $60,000 Equipment-related costs (rent, maintenance, energy, and so on), $400,000. These costs are allocated to HT and ST on the basis of test-hours. Setup costs, $385,000. These costs are allocated to HT and ST on the basis of the number of selup-hours required. HT requires 13,500 setup-hours, and ST requires 4,000 setup-hours. Costs of designing tests. $252.000. These costs are allocated to HT and ST on the basis of the time required to design the tests. HT requires 2,800 hours, and ST requires 1,400 hours. 1. d. Setup 2. Design Classify each activity cost as output unit-level, batch-level, productor service-sustaining, or facility-sustaining. Explain each answer. 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 Hopkinton calculated using its simple costing system. Explain the accuracy of the product costs calculated using the simple costing syster and the ABC system. How might Hopkinton's managerrient use the cost hierarchy and ABC information to better manage its business? Total 3. Print Done Enter any number in the edit fields and then 6 parts remaining Check Answer Print Done

Answer 1

Ans.

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

Explanation:

Output unit-level costs:

a. Direct-labor costs, $243,000. These costs can be directly traced to HT, $183,000, and ST, $60,000.

b. Equipment-related costs (rent, maintenance, energy, and so on), $400,000. These costs are allocated to HT and ST on the basis of test-hours.

These are classified as output unit-level costs because they are incurred on each unit of materials tested, that is, for every hour of testing.

Batch-level costs:

c. Setup costs, $385,000. These costs are allocated to HT and ST on the basis of the number of setup-hours required. HT requires 13,500 setup-hours, and ST requires 4,000 setup-hours.

These are classified as batch-level costs as they are incurred each time a batch of materials is set up for HT or ST, irrespective of the number of hours for which tests are subsequently run.

Service-sustaining costs:

d. Costs of designing tests, $252,000. These costs are allocated to HT and ST on the basis of the time required for designing the tests. HT requires 2,800 hours, and ST requires 1,400 hours.

These are classified as service-sustaining costs, as they are incurred to design the HT and ST tests, instead of number of batches tested or number of hours of test time.

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 Hopkinton calculated using its simple costing system.

	Heat Testing		Stress Testing
	Total (a)	Per Hour (b) = (a)/60,000	Total (c)	Per Hour (d) = (b)/40,000)
Direct labor costs (given)	$       183,000.00	$        3.05	$   60,000.00	$          1.50
Equipment-related costs
$4 per hour * 60000 hours	$       240,000.00	$        4.00
$4 per hour * 40000 hours			$ 160,000.00	$          4.00
Setup Costs
$22 per setup-hour * 13500 setup hours	$       297,000.00	$        4.95
$22 per setup-hour * 4000 setup hours			$   88,000.00	$          2.20
Costs of designing tests
$60 per hour * 2800 Hours	$       168,000.00	$        2.80
$60 per hour * 1400 Hours			$   84,000.00	$          2.10
Total Costs	$       888,000.00	$      14.80	$ 392,000.00	$          9.80
Equipment-related costs	$       400,000.00
Test Hours	100,000
Per hour cost	$                  4.00
Setup costs	$       385,000.00
setup-hours	17,500
Per hour setup cost	$                22.00
Costs of designing tests	$       252,000.00
designing tests hours	4,200
Per hour designing cost	$                60.00

At a cost per test-hour of $13, the simple costing system under costs heat testing ($14.80) and over costs stress testing ($9.80). The reason is that HT uses direct labor, setup, and design resources per hour more intensively than ST. Heat tests are more complex, takes long time to set up, and more tough to design. The simple costing system assumes that testing costs per hour are the same for HT and ST.

3.Explain the accuracy of the product costs calculated using the simple costing system and the ABC system. How might Hopkinton's management use the cost hierarchy and ABC information to better manage its business.

The ABC system produces more accurate product cost as it identifies all the activities undertaken for HT and ST, when performing the test and recognize the levels of cost hierarchy at which costs differ.

Hopinkton's management can use the information from the ABC system to make better pricing and product mix decisions. Like, it may charge high prices for the more costly HT and plan to reduce prices on the less costly ST.

Hopinkton can also use ABC information to control the costs by reducing processes and activities that do not add any value, identifying and evaluating new methods to do the testing that will reduce the activities needed to do the tests, reducing the costs of performing various activities, planning and managing activities.