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Hull Test Laboratories does heat testing (HT) and stress testing (ST) on materials and operates at capacity. Under its current simple costing system, Hull aggregates all operating costs of $1,260,000 into a single overhead cost pool. Hull calculates a rate per test-hour of $14 ($1,260,000 / 90,000 total test-hours). HT uses 50,000 test-hours, and ST uses 40,000 test-hours. Gary O'Loughlin, Hull'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 Hull to lose business. O'Loughlin divides Hull's costs into four activity-cost categories. E: (Click the icon to view the activity-cost categories.) Read the requirements. i Requirements 1. 2. Classify each activity cost as output unit-level, batch-level, product or 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 $14 per test-hour that Hull calculated using its simple costing system. Explain the accuracy of the product costs calculated using the simple costing system and the ABC system. How might Hull's management use the cost hierarchy and ABC information to better manage its business? 3. i Data Table a. Direct-labor costs, $145,000. These costs can be directly traced to HT, $100,000, and ST, $45,000. b. Equipment-related costs (rent, maintenance, energy, and so on), $540,000. These costs are allocated to HT and ST on the basis of test-hours. c. Setup costs, $300,000. 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, $290,000. 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 requires 2,500 hours. Check Answer

Answer 1

(1) Unit level cost, Batch Level cost,product-service sustaining cost,facility sustaining cost

Direct Labor cost;145000: Product-service sustaining cost

This is product-service sustaining cost since its support individual services regardless of the number units or batches in which the units are produced. Here direct labor cost can be traced to individual service, not to each unit or batch of services. Hence its a product-service sustaining cost

Equipment Related cost;54000: Facility sustaining cost

This is a Facility sustaining cost since it cant be traced to individual produtcs but support the organistaions as a whole.

Set up cost; 300000: Batch level cost

Usually set up is required before production of a batch. hence its classified as batch level cost.

However if its can't be traced to batches, then it can be classified as product-service sustaining cost.

Cost of designing test; 29000: batch level cost

Its a batch level cost since the cost can be traced to each batch of similar test designed.

It cant be traced to each unit of test hour.

(2)

Pasticcalass Arsount Cost DRver cost DR.ve HT usts Droect laboces 1 45000 precty 45000 teaced 1.00.000 Cost thoproduct Equproest selated Cost 240, 0O 90,000 H Test Hocras 5 40,06O x 40, c0 540,000 540.000 50000 90000 99000 etup cost IS00ohes 2.00.06O Setup Hous 300 000 G00 000X10,00 3,00,000 x5,00D 15000 1.4spoo So00 has 1,45,00O Cost of tests desigy 2.90.000 Design Hocas 2.90.000 x2500 E.90c00x asoo SODD Total cost of 5,30, 00 o 745.000 40,000 HaS To tal test Houas 60, 000 HRS $14.9/68 12.15000 13 25 (hg

Particulars	HT	ST
Under new costing system	14.9/hour	13.25/hour
Under simple costing system	14/hour	14/hour
Difference	0.9 increase	0.75 decrease

Under simple costing system, All cost are pooled together and allocated based on test hours. However under new costing system, costs are pooled to each product head on the basis on activities related to each service.This is the main reason for the difference in the rate. The new costing system gives a more accurate picture of the cost of each service.

In addition to that, in simple costing system, only $1260000 is recognised. In new costing system, $1275000 is recognised. An additional $ 15000 is recognised in new costing system. This amount might be allocated as a general overhead in the old system. This also cause a reason for the difference.

(3) In simple costing system, cost is pooled to product or services. while ABC costing system assigns cost to activities. In ABC, it tracks the flow of activities by creating internal link between activity and cost object. This helps in more accurate cost allocation.

Hence ABC is more preferable in costing if more than one service or product is provided.

In case of management, ABC is better in managing the business and cost hierarchy since the simple costing system is not rich enough to supply the information needed for thorough analysis of linkages.

ABC are mostly essential part of strategic analysis. Activities not based on production units/ sales units, based on variable activity drivers are analysed.