Question

%E5-19 (similar Vineyard Test Laboratories does heat testing (HT) and stress testing (ST) on materials and operates at capacity. Under its current simple costing system, Vineyard aggregates all operating costs of $1,330,000 into a single overhead cost pool. Vineyard calculates a rate per test-hour of $14 (51,330,000/ 95,000 total test hours). HT uses 63.000 test-hours, and ST uses 32,000 test-hours. Gary Celeste, Vineyard'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 Vineyard to lose business Celeste divides Vineyard's costs into four activity.cost categories (Click the icon to view the activity-cost categories.) Read the requirements Activity rate Activity hours per test type Cost per activity Calculate the cost of each activity and the total cost of the heat testing and stress testing, Heat Test (HT) Data Table TOWN Cost Direct labor a Drect labor costs, $200,000. These costs can be directly traced to HT, $189.000, Equipment and ST, $80,000 b. Equipment-related costs (rent, maintenance, energy, and so on). $475,000. These Setup costs are allocated to HT and ST on the basis of test-hours. 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 13,000 setup hours, and ST requires Total 4,500 setup-hours Costs of designing tests, S248,000. These costs are allocated to HT and ST on the basis of the time required to design the tests. HT requires 2,500 hours, and ST Enter any number in the edit fields and then requires 1,500 hours Design d. ck Answer nas

Answer 1

Solution

Vineyard Test Laboratories

Classification of each activity cost as output unit-level, batch-level, product- or service-sustaining or facility-sustaining:

Activity Explanation Direct labor Equipment related costs Classification Output unit- level Output unit- level These costs are output unit-level as they are incurred for every hour of testing. These costs are incurred every time a batch of materials are setup for testing. Setup Batch-level Service- sustaining costs These costs are incurred to design the tests and are incurred regardless of test hours or number of batches. Design

2.. Calculation of total cost of each activity and the total cost of the heat testing and stress testing:

Direct labor Equipment Setup Design total cost total test hours Cost per test- hour Heat Test Stress Test $189,000 $80,000 $315,000 $160,000 $286,000 $99,000 $155,000 $93,000 $945,000 $432,000 63,000 32,000 $15 $13.50

Computations –

Cost per activity –

Direct labor –

Direct labor costs are directly traced.

Equipment –

Equipment – allocated on the basis of test-hours.

Equipment related costs = $475,000

Total test-hours = 95,000

Activity rate = $475,000/95,000 = $5 per test-hour

Setup –

Setup – allocated on the basis of setup-hours

Setup costs = $385,000

Setup hours = (13,000 + 4,500) = 17,500

Activity rate = $385,000/17,500 = $22 pet setup hour

Design –

Design – allocated on the basis of time required to design the tests

Design cost = $248,000

Hours needed to design = 2,500 + 1,500 = 4,000

Activity rate = $248,000/4,000 = $62 per design hour

Allocation of costs to HT and ST –

Heat Test (HT) Allocated Cost Activity Rate Activity Usage 63,000 test Equipment hours 13,000 setup Setup hours $315,000 $5 per test hour $22 per setup hour $62 per design hour $286,000 Design 2,500 hours $155,000

Stress Test (ST) Allocated Cost Activity Rate Activity Usage 32,000 test Equipment hours 4,500 setup Setup hours $160,000 $5 per test hour $22 per setup hour $62 per design hour $99,000 Design 1,500 hours $93,000

On comparison with ABC costing system, simple costing cost per test hour is as follows,

Simple Costing System ABC System $14 $15 HT Cost per test hour ST cost per test- hour $14 $13.50

The simple costing system undercosts HT (difference $1) and overcosts ST (difference $0.50).

Reasons are HT uses more test hours, setup hours and design hours, however simple costing allocates costs simply on the basis of test-hours, which does not provide accurate allocation of costs. Likewise, ST uses less test hours, needs less setup hours and its design is not so complex. But, simple costing allocates costs to ST based on test-hours regardless of its less use of resources.

1. Accuracy of products costs calculated using simple costing system and ABC system:

The ABC system takes into consideration all activities that are involved for performing HT and ST. The system aims to identify the level of resources used by each test and cost for each activity. Therefore, ABC system allocates costs more accurately to tests.

The management might use the ABC information to make improved billing (pricing) decisions as well product mixing. Using the ABC system, the company might decide to price HT a little higher, while lowering the price for ST. Since, the market for test services is growing more competitive the company could use the information provided by ABC system to price the tests more competitively.

The company could also identify non-value adding activities so as to reduce the related costs to achieve cost competitiveness.