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Orange Test Laboratories does heat testing (HT) and stress testing (ST) on materials and operates at capacity. Under its current simple costing system, Orange aggregates all operating costs of 1275000 into a single overhead cost pool. Orange calculates a rate per test-hour of 15(1275000 85000 total test-hours). HT uses 60000 test-hours, and ST uses 25000 test-hours. Gary Gaffney, Orange'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 orange to lose business. Gaffney divides orange's costs into four activity-cost categories.
Orange Test Laboratories does heat testing (HT) and stress testing (ST) on materials and operates at capacity. Under its current simple costing system, Orange aggregates all operating costs of $1,275,000 into a single overhead cost pool. Orange calculates a rate per test-hour of $15 (51,275,000 = 85,000 total test-hours). HT uses 60,000 test-hours, and ST uses 25,000 test-hours. Gary Gaffney, Orange'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 Orange to lose business. Gaffney divides Orange's costs into four activity-cost categories. Click the icon to view the activity-cost categories.) Read the requirements Data table a. b. c. Direct-labor costs, $418,000. These costs can be directly traced to HT, $360,000, and ST, $58,000. 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. Setup costs, S396,000. These costs are allocated to HT and ST on the basis of the number of setup-hours required. HT requires 11,500 setup-hours, and ST requires 5,000 setup-hours. Costs of designing tests, $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 2,500 hours. d. Print Done Requirements 1. 2. Classify each activity cost as output unit-level, batch-level, productor service-sustaining, or facility-sustaining. Explain each answer. Calculate the cost per test-hour for HT and ST. Explain briefly the reasons why these numbers differ from the $15 per test-hour that Orange calculated using its simple costing system. Explain the accuracy of the product costs calculated using the simple costing system and the ABC system. How might Orange's management use the cost hierarchy and ABC information to better manage its business? 3. Print Done Requirement 1. Classify each activity cost as output unit-level, batch-level, product or service-sustaining, or facility-sustaining. Explain each answer. Cost Item a. Direct labor Cost-type Output unit-level Output unit-level Batch-level b. Equipment-related costs (rent, maintenance, energy, etc.) C. Setup costs d. Costs of designing tests Service-sustaining Output unit-level costs are related to the number of units tested; required for each unit tested. Batch-level costs are related to a group of units of the service. They are not related to the number of units tested. Service-sustaining costs are costs used to support individual services regardless of the number of units or batches tested. Facility-sustaining costs are costs that can not be traced to individual services but support the company as a whole. Requirement 2. Calculate the cost per test-hour for HT and ST. Explain briefly the reasons why these numbers differ from the $15 per test-hour that Orange calculated using its simple costing system. First, determine the formula used to calculate the cost for each activity in each test type. Activity rate Activity hours per test type = Cost per activity Calculate the cost of each activity and the total cost of the heat testing and stress testing. Heat Test (HT) Total Cost Direct labor Equipment Setup Design Total
