ABC, cost hierarchy, service. Halifax Test Laboratories does heat testing (HT) and stress test¬

ing ($T) on materials. Under its current costing system, Halifax aggregates all operating costs of $1,440,000 into a single overhead cost pool. Halifax calculates a rate per test hour of

$18 ($1,440,000 -e 80,000 total test-hours). HT uses 50,000 test-hours and $T uses 30,000 testhours. Gary Celeste, Halifax’s controller, believes that there is enough variation in test procedures and cost structures to establish separate costing and billing rates. The market for test services is very competitive, and without this information, any miscosting and mispricing could cause Halifax to lose business. Celeste breaks down Halifax’s costs into four activity-cost categories.

1. Direct labour costs, $288,000. These costs can be directly traced to HT, $216,000, and $T,

$72 000

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3. Setup costs, $420,000. These costs are allocated to HT and ST based on the number of setup-hours required. HT requires 13,500 setup-hours and ST requires 4,000 setup-hours.
4. Costs of designing tests, $252,000. These costs are allocated to HT and $T based on the time required to design the tests. HT requires 2,800 hours and $T requires 1,400 hours.
Required 1. Classify each ofthe activity costs as output unit level, batch level, product or service sustain¬
ing, or facility sustaining. Explain your answer.
2. Calculate the cost per test-hour for HT and $T. Explain briefly the reasons why these numbers differ from the $18 per test-hour drat Halifax had calculated using its existing costing system.
3. Explain the cost differences and the accuracy of the product costs calculated using the existing and the ABC systems. How might Halifax’s management use the cost hierarchy \ and ABC information to manage its business better?