5-19 Holliston Test Laboratories does heat testing (HT) and stress testing (ST) on materials and operates at capacity. Under its current simple costing system, Holliston aggregates all operating costs of S1,200.000 into a single overhead cost pool. Holliston calculates a rate per test-hour of $16 (S1,200,000 75,000 total test-hours). HT uses 50,000 test-hours, and ST uses 25,000 test-hours. Gary Mahoney, Holliston'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 Holliston to lose business. Mahoney divides Holliston's costs into four activity-cost categories a. Direct-labor costs, $225,000. These costs can be directly traced to HT, $175,000, and b. Equipment-related costs (rent, maintenance, energy, and so on), S375,000. These c. Setup costs, $360,000. These costs are allocated to HT and ST on the basis of the ST $50,000. costs are allocated to and ST on the basis of test-hours. number of setup-hours required. HT requires 10,000 setup-hours, and ST requires 5,000 setup-hours. d. Costs of designing tests, $240,000. 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 1,500 hours. Requirements 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 $16 per test-hour that Holliston 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 Holliston's management use the cost hierarchy and ABC information to better manage its business