Question

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 comma 190 comma 000 into a single overhead cost pool. Vineyard calculates a rate per​ test-hour of $ 17 ​($ 1 comma 190 comma 000 ​/ 70 comma 000 total​ test-hours). HT uses 40 comma 000 ​test-hours, and ST uses 30 comma 000 ​test-hours. Gary Maloney​, 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. Maloney divides Vineyard​'s costs into four​ activity-cost categories.

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 $1,190,000 into a single overhead cost pool. Vineyard calculates a rate per test-hour of $17 ($1,190,000 / 70,000 total test-hours). HT uses 40,000 test-hours, and ST uses 30,000 test-hours. Gary Maloney, 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. Maloney divides Vineyard's costs into four activity-cost categories. (Click the icon to view the activity-cost categories.) Read the requirements. Data Table e the Requirements ecal 1. Classify each activity cost as output unit-level, batch-level, productor 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 $17 per test-hour that Vineyard 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 Vineyard's management use the cost hierarchy and ABC information to better manage its business? a. Direct-labor costs, $126,000. These costs can be directly traced to HT, $90,000, and ST, $36,000. b. Equipment-related costs (rent, maintenance, energy, and so on), $350,000. These costs are allocated to HT and ST on the basis of test-hours. C. Setup costs, $430,000. These costs are allocated to HT and ST on the basis of the number of setup-hours required. HT requires 13,600 setup-hours, and ST requires 3,600 setup-hours. d. Costs of designing tests, $264,000. These costs are allocated to HT and ST on the basis of the time required to design the tests. HT requires 3,000 hours, and ST requires 1,400 hours. syst r manage le cd bducts. Print Done Print Done

Answer 1

Solution:

응 Requirement 1 Calculation of Predetermined overhead rate using Activity Based Costing Estimated Activity Cost Pool Total Cost Driver Overhead Cost Direct Labor Cost $1,26,000 1,26,000 Equipment Cost $3,50,000 . 70,000 Setup Cost $4,30,000 17,200 Design Cost $2,64,000 4,400 • Predetermined OH allocation Rate $1 $5 $25 $60 . • II Formula to calculate cost for each activity Predetermined OH Cost Driver allocation rate х Cost per Activity Computation of Total Amount of Overhead (Activity-based costs) Heat Test (HT) Direct Labor Cost $90,000 Stress Test (ST) $36,000 Equipment Cost Setup Cost $2,00,000 (40,000 test hours * $5) $3,40,000 (13,600 setup Hrs * $25) $1,80,000 (3,000 Design hrs * $60) $8,10,000 $1,50,000 (30,000 test hours * $5) $90,000 (3,600 setup Hrs * $25) $84,000 (1,400 Design hrs * $60) $3,60,000 Design Cost Total Cost

Requirement 2 Determination of HT cost per test hour Total HT Costs / HT test hours = HT cost per test-hour $810,000 / 40,000 hours = $20.25 per test-hour Determination of ST cost per test hour Total ST Costs / ST test hours = ST cost per test-hour $360,000 / 30,000 hours = $12 per test-hour

Requirement 3 The accuracy of the product costs will be more with the ABC System instead of the simple costing System.