Ayer Test Laboratoriesdoes neat testing (H I) and stress testing (ST) on materials and operates at capacity. Under its current simple costing system, Ayer aggregates all operating costs of $1,360,000 into a single overhead cost pool. Ayer calculates a rate per test-hour of $16 ($1,360,000 I 85,000 total test-hours). HT uses 55,000 test-hours, and ST uses 30,000 test-hours. Gary Daley, Ayer'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 miscasting and mispricing of its services could cause Ayer to lose business. Daley divides Ayer's costs into four activity-cost categories

Requirement 1. Classify each activity cost as output unit-level, batch-level, product- or service-sustainin facility-sustaining.

Cost Item Cost-type

Direct labor

Equipment-related costs (rent, maintenance, energy, etc.)

c. Setup costs

d. Costs of designing tests

costs that can not be traced to individual services but support the company a Output unit-level costs are costs used to support individual services regardless of the number of units or

related to a group of units of the service. They are not related to the number related to the number of units tested; required for each unit tested.

costs that can not be traced to individual services but support the company as a w Batch-level costs are costs used to support individual services regardless of the number of units or bate! related to a group of units of the service. They are not related to the number of uni

related to the number of units tested; required for each unit tested.

costs that can not be traced to individual services but support the company Service-sustai ning costs are costs used to support individual services regardless of the number of units related to a group of units of the service. They are not related to the numbe

related to the number of units tested; required for each unit tested.

costs that can not be traced to individual services but support the company Facility-sustaining costs are costs used to support individual services regardless of the number of units 1

related to a group of units of the service. They are not related to the numbe

related to the number of units tested; required for each unit tested.

r . . 1 . .

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(cont.)

Requirement 2. Calculate the cost per test-hour for HT and ST. Explain briefly the reasons why these m the $16 per test-hour that Ayer calculated using its simple costing system.

First, determine the formula used to calculate the cost for each activity in each test type.

x = Cost per activity Calculate the cost of each activity and the total cost of the heat testing and stress testing.

Heat Test (HT) Stress Test (ST)

Total

Cost

Total

Cost

Direct labor Equipment Setup Design

Total

Determine the formula to calculate the HT cost per test-hour and enter the amounts to calculate the rate. the nearest cent.)

===========! I. :=:==========::::::

= HT Cost per test-hour

...._

, I -------

= I I per test-hour

Determine the formula to calculate the ST cost per test-hour and enter the amounts to calculate the rate. the nearest cent.)

:=:============ /.

:=:============::::::

= ST Cost per test-hour

------ = I I per test-hour

The cost per test-hour for HT and ST differs from the cost per test-hour using the simple rate because:

Requirement 3. Explain the accuracy of the product costs calculated using the simple costing system ar How might Ayer's management use the cost hierarchy and ABC information to better manage its busines

higher lower

the same

The accuracy of the product costs will be

with the ABC system instead of the simple costing i

l.

(cont.) product costs will

better reflect

not accurately reflect

the utilization of

direct indirect

resources by both products.

hide indirect costs in large cost pools

Management can use the ABC costs to . The c1

more accurately determine if employees are productive

more accurately determine product costs

direct

enables management to more accurately determine the cost drivers of indirect costs.

labor shipping

Data Table

Direct-labor costs, $338,000. These costs can be directly traced to HT, $275,000, and ST, $63,000.

b. Equipment-related costs (rent, maintenance, energy, and so on), $340,000. These costs are allocated to HT and ST on the basis of test-hours.

c. Setup costs, $357,000. These costs are allocated to HT and ST on the basis of the number of setup-hours required. HT requires 13,000 setup-hours, and ST requires 4,000 setup-hours.

Costs of designing tests, $283,500. These costs are allocated to HT and ST on the basis of the time required to design the tests. HT requires 3,000 hours, and ST requires 1,500 hours.

Requirements

Requirements

Classify each activity cost as output unit-level, batch-level, product- or service-sustaining, or facility-sustaining. Explain.

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 Ayer 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 Ayer's management use the cost hierarchy and ABC information to better manage its business?