Domino Labs is a freestanding facility that conducts two kinds of tests for nearby physician practices. Test 1 is ordered in large volumes and can be processed in large batches. Test 2 is ordered in much smaller quantities and is processed in smaller batches. In addition, to ensure quality for test 2, Domino must purchase the necessary reagents in small quantities.

Domino has a single facility where it conducts all its tests. Its major direct cost is labor. However, there is a substantial amount of overhead in the lab's purchasing and material-handling activities. Many of these activities are highly automated, especially material handling. The expected direct costs for a single test of each type are as follows:

	Test 1	Test 2
Direct material	$0.50	$1.00
Direct labor	$3.00	$3.00
Other direct costs	$1.00	$1.00

Domino's budget for the upcoming year includes overhead of $660,000 million, which currently is attached to each test on the basis of machine hours. However, Domino's controller believes that this approach may be providing misleading information. She has developed the following analysis of the budgeted overhead costs:

Activities	Cost Driver	Number	Cost
Purchasing	Purchase order	600 POs	$ 300,000
Material Handling	Batches	900 Batches	$ 360,000
Total Overhead Costs		$ 660,000

Budget data for producing the two tests throughout the upcoming year are as follows:

OH 660,000

Purchase 300,000

Handling 360,000

	Test 1	Test 2	Total
Test Conducted	400,000	100,000	500,000
Machine Hours	200,000	50,000	250,000
Purchase Orders	200	400	600
Batches	250	650	900

Using these data and the table that follows, determine the cost of one test of each type, first using the traditional approach of absorbing overhead based on machine hours, and then using an ABC approach.

	Traditional Approach	ABC Approach
	Test 1	Test 2	Test 1	Test 2
Direct Material
Direct Labour
Other Direct
Overhead
Total

explain the causes of the difference between the cost you get using traditional and ABC approaches.