=+6-27 KK Activity-based costing, cost hierarchy, service (CMA, adapted) OBJECTIVES 6, 7 Lode Test Laboratories (LTL) does heat testing and stress testing on materials and operates at capacity. Under its current simple costing system, LTL aggregates all operating costs of $2560000 into a single cost pool. LTL calculates a rate per test-hour of $20

($2560000 ÷ 128000 total test-hours). Heat testing uses 80000 test-hours and stress testing uses 48000 test-hours. Gary Celeste, LTL’s management accountant, believes that there is enough variation in test procedures and cost structures to establish separate costing and billing rates for heat testing and stress testing. The market for test services is becoming competitive. Without this information, any incorrect costing and pricing of its services could cause LTL to lose business. Gary divides LTL’s costs into four activity cost categories.

a Direct labour costs, $486000. These costs can be directly traced to heat testing, $366000, and stress testing, $120000.

b Equipment-related costs (e.g. rent, maintenance, energy), $800000. These costs are allocated to heat and stress testing on the basis of test-hours.

c Set-up costs, $770000. These costs are allocated to heat and stress testing on the basis of the number of set-up hours required.

Heat testing requires 13500 set-up hours and stress testing requires 4000 set-up hours.

d Costs of designing tests, $504000. These costs are allocated to heat and stress testing on the basis of the time required to design the tests. Heat testing requires 4200 hours, and stress testing requires 2100 hours.

Required 1 Classify each activity cost as output unit level, batch level, product or service sustaining, or organisation sustaining. Explain each answer.