E5-19 (similar to)

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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

$1,190,000

into a single overhead cost pool.

Holliston

calculates a rate per test-hour of

$17

($1,190,000

70,000

total test-hours). HT uses

40,000

test-hours, and ST uses

30,000

test-hours. Gary

Sarsfield,

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.

Sarsfield

divides

Holliston's

costs into four activity-cost categories.

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(Click the icon to view the activity-cost categories.)Read the requirements

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.

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

Cost Item

Cost-type

a.

Direct labor

b.

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

c.

Setup costs

d.

Costs of designing tests

Choose from any drop-down list and then click Check Answer.

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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 $17 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?

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