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 $1,200,000 into a single overhead 

cost pool. Holliston calculates a rate pertest-hour of $16 ($1,200,000  75,000 totaltest-hours). HT uses 50,000 test-hours, and ST uses 25,000 test-hours. Gary Lawler, 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. Lawler divides Holliston's costs into fouractivity-cost categories.

 

Data Table:

a.

Direct-labor costs, $105,000. These costs can be directly traced toHT, $75,000, andST, $30,000.

b.

Equipment-related costs(rent, maintenance,energy, and soon), $450,000. These costs are allocated to HT and ST on the basis oftest-hours.

c.

Setupcosts, $425,000. These costs are allocated to HT and ST on the basis of the number ofsetup-hours required. HT requires 12,000 setup-hours, and ST requires 5,000 setup-hours.

d.

Costs of designingtests, $270,000. These costs are allocated to HT and ST on the basis of the time required for designing the tests. HT requires 2,500 hours, and ST requires 2,000 hours.

Requirements:

1.

Classify each activity cost as outputunit-level, batch-level,product- orservice-sustaining, orfacility-sustaining. Explain each answer.

2.

Calculate the cost pertest-hour for HT and ST. Explain briefly the reasons why these numbers differ from the $16 pertest-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 itsbusiness?