Question

Maynard Test Laboratories does heat testing (HT) and stress testing (ST) on materials and operates al capacity. Under its current simple casting system, Maynard aggregates al operating costs of $1,300,000 into a single overhead cost pool. Waynard calculates a rate per test hour af S18 (31.380,00 85.000 Total test-hours). HT USA 55 000 test-hours and ST BS 30 000 test-hours. Gary Maloney. Waynard's controler believes that there is enough variation in test procecures and cost sh.chures to establish separate costing and biling rates for HT and ST The market for test services is becomin cuir petitive. Without this information, any irisculing and mispricing of its services could cause Maynard to love business. Maloney divider Maynaru's costs in four activity-cost categories Click the icon to view the activly cast categories.) Read the requirements Requirement 1. Classily each activity vusl av output urit-level, batch-level, product or service-ustaning, or facili-susleiring. Explaineach answer. Costem Cost-type a. Direct labor b. Cuupment-related is frent, maintenance, energy, etc.) 6. Setup coate d. Costs of designing tests Outpul unit-level costs are Batch level casts aru Service-sustaining costs are Faclilyutaning coels are Requirement 2. Calculate the cost per leel-hour for HT and ST. Explain briefly the reasons why these numbers differ from the $18 per test-hour that Mayrard calculated using is simples Uusling syster. First, Cetermine the formula used to calculate the cost for each activity in each lest typu. Cost par activity Data Table Calculate the cost of each civily and the lola wst of the leal leeling and strese lesing. Heat Tast (HT) Stress Tast (ST) Total Total Cat Druct labor Equipment Sour Design a. Direclabor costs, 1838,000. These costs can be direct traced to HT, $275,000, and ST. $63,000. b. Equipment related sosis (rent, maintenance, energy, and so on, $340,000. These Dosts are allocated to HT and ST on the basis of last hours c. Schun costs, S357.000. These costs are allocated to HT and ST on the bass of the number of selup-hour required HT requires 13,000 Secup-hours, and ST requires 4,000 schup-hours. d. Costs of Cesigning tests, 3283,500. These costs are allocated to IT and ST on the basis of the time required to design na testa. Trenuires 3.000 hours and ST requires 1,500 hours. Toba Print Dana Determine the formula o calculate the HT usl per test-hour and enter the annuils to calculate the rate. (Round the rate to the nearest cent) HT Cast per best-hour cer test. hour 4

Answer 1

1)
Cost Item	Cost-Type
a. Direct Labor	Output unit-level
b. Equipment-related costs (rent, maintenance, energy, etc)	Output unit-level
c. Setup costs	Batch-level
d. Costs of designing tests	Service-sustaining
Output unit level costs are related to the number of unit 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.
2)
Activity Rate x Activity hours per test type = Cost per activity
	Heat Testing	Stress Testing
Direct labor costs (given)	$                                275,000	$        63,000
Equipment-related costs	$                                220,000	$      120,000
Setup Costs	$                                273,000	$        84,000
Costs of designing tests	$                                189,000	$        94,500
Total Costs	$                                957,000	$      361,500
Total HT costs / HT test-hours = HT Cost per test-hour
$957000/55000	$                                         17
Total ST costs / ST test-hours = ST Cost per test-hour
361,500/30000	$                                    12.05
The cost per test-hour for HT and ST differs from the cost per test-hour using the simple rate because
HT is allocated a higher proportion of indirect costs because it uses more resources
HT and ST use different amounts of overhead resources. The simple method does not take that into account
Indirect costs are subdivided into 4 activity-cost categories to more accurately determine cost drivers of indirect costs
3)
The accuracy of the product costs will be HIGHER with the ABC system instead of the simple costing system. The ABC product costs will BETTER REFLECT the utilization of INDIRECT resources by both products.
Management can use the information from the ABC system to make better  pricing and product mix decisions
The cost hierarchy enables management to more accurately determine the cost drivers of indirect costs.

30 31 32 Direct labor costs (given) 33 Equipment-related costs 34 Setup Costs 35 Costs of designing tests 36 Total Costs Heat Testing 275000 =340000/85000*55000 =357000/(13000+4000)*13000 =283500/(3000+1500)*3000 =SUM(B32:835) Stress Testing 63000 =340000/85000*30000 =357000/(13000+4000) * 4000 =283500/(3000+1500) *1500 =SUM(C32:C35) 37 38 Total HT costs / HT test-hours = HT Cost per test-hour 39 $957000/55000 =B36/55000 40 Total ST costs / ST test-hours = ST Cost per test-hour 41 361,500/30000 42 =C36/30000