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HalifaxHalifax Test Laboratories does heat testing (HT) and stress testing (ST) on materials. Under its current costing system, HalifaxHalifax aggregates all operating costs of $

HalifaxHalifax

Test Laboratories does heat testing (HT) and stress testing (ST) on materials. Under its current costing system,

HalifaxHalifax

aggregates all operating costs of

$ 1 comma 440 comma 000$1,440,000

into a single overhead cost pool.

HalifaxHalifax

calculates a rate per test-hour of

$ 18$18

($ 1 comma 440 comma 000$1,440,000

/

80 comma 00080,000

total test-hours). HT uses

50 comma 00050,000

test-hours, and ST uses

30 comma 00030,000

test-hours. Gary

CelesteCeleste ,

HalifaxHalifax '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

HalifaxHalifax

to lose business.

CelesteCeleste

breaks down

HalifaxHalifax 's

costs into four activity-cost categories.

1.

Direct-labour costs,

$ 288 comma 000$288,000.

These costs can be directly traced to HT,

$ 216 comma 000$216,000 ,

and ST,

$ 72 comma 000$72,000.

2.

Equipment-related costs (rent, maintenance, energy, and so on),

$ 480 comma 000$480,000.

These costs are allocated to HT and ST on the basis of test-hours.

3.

Setup costs,

$ 420 comma 000$420,000.

These costs are allocated to HT and ST based on the number of setup-hours required. HT requires

13 comma 50013,500

setup-hours, and ST requires

4 comma 0004,000

setup-hours.

4.

Costs of designing tests,

$ 252 comma 000$252,000.

These costs are allocated to HT and ST based on the time required to design the tests. HT requires

2 comma 8002,800

hours, and ST requires

1 comma 4001,400

hours.

Requirements

1.

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

2.

Calculate the cost per test-hour for HT and ST using activity-based costing (ABC). Explain briefly the reasons why these numbers differ from the

$ 18$18

per test-hour that

HalifaxHalifax

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

HalifaxHalifax 's

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

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