Question

Maynard Test Laboratories does heat testing​ (HT) and stress testing​ (ST) on materials and operates at capacity. Under its current simple costing​ system, Maynard aggregates all operating costs of $975,000 into a single overhead cost pool. Maynard calculates a rate per​ test-hour of $13 ​($975,000​/75,000 total​ test-hours). HT uses 55,000 ​test-hours, and ST uses 20,000 ​test-hours. Gary O'Loughlin​, Maynard​'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 Maynard to lose business. O'Loughlin divides Maynard​'s costs into four​ activity-cost categories.

data

a.	​Direct-labor costs, $217,000. These costs can be directly traced to​ HT, $165,000​, and​ ST, $52,000.
b.	​Equipment-related costs​ (rent, maintenance,​ energy, and so​ on), $375,000. These costs are allocated to HT and ST on the basis of​ test-hours.
c.	Setup​ costs, $375,000. 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, $248,000. These costs are allocated to HT and ST on the basis of the time required to design the tests. HT requires 2,000 ​hours, and ST requires 2,000 hours

1.	Classify each activity cost as output​ unit-level, batch-level,​ product- or​ 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 $13 per​ test-hour that Maynard 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 Maynard​'s management use the cost hierarchy and ABC information to better manage its​ business?

Answer 1