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

Plymouth

aggregates all operating costs of

$1,275,000

into a single overhead cost pool.

Plymouth

calculates a rate per test-hour of

$15

($1,275,000

/

85,000

total test-hours). HT uses

60,000

test-hours, and ST uses

25,000

test-hours. Gary

Daley,

Plymouth'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

Plymouth

to lose business.

Daley

divides

Plymouth's

costs into four activity-cost categories.

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

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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 labour

b.

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

c.

Setup costs

d.

Costs of designing tests

Output unit-level costs are

costs that cannot be traced to individual services but support the company as a whole.

costs used to support individual services regardless of the number of units or batches tested.

related to a group of units of the service. They are not related to the number of units tested.

related to the number of units tested; required for each unit tested.

Batch-level costs are

costs that cannot be traced to individual services but support the company as a whole.

costs used to support individual services regardless of the number of units or batches tested.

related to a group of units of the service. They are not related to the number of units tested.

related to the number of units tested; required for each unit tested.

Service-sustaining costs are

costs that cannot be traced to individual services but support the company as a whole.

costs used to support individual services regardless of the number of units or batches tested.

related to a group of units of the service. They are not related to the number of units tested.

related to the number of units tested; required for each unit tested.

Facility-sustaining costs are

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

Plymouth

calculated using its simple costing system.

First, determine the formula used to calculate the cost for each activity in each test type.

x

=

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 labour
Equipment
Setup
Design
Total

Stress Test (ST)

Total

Cost

Determine the formula to calculate the HT cost per test-hour and enter the amounts to calculate the rate. (Round the rate to the nearest cent.)

		/		=	HT Cost per test-hour
		/		=		per test-hour

Determine the formula to calculate the ST cost per test-hour and enter the amounts to calculate the rate. (Round the rate to the nearest cent.)

		/		=	ST Cost per test-hour
		/		=		per test-hour

The cost per test-hour for HT and ST differs from the cost per test-hour using the simple rate because:

Requirement 3. Explain the accuracy of the product costs calculated using the simple costing system and the ABC system. How might

Plymouth's

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

The accuracy of the product costs will be

higher

lower

the same

with the ABC system instead of the simple costing system. The ABC product costs will

better reflect

not accurately reflect

the utilization of

direct

indirect

resources by both products.

Management can use the ABC costs to

hide indirect costs in large cost pools.

more accurately determine if employees are productive.

more accurately determine product costs.

The cost hierarchy enables management to more accurately determine the cost drivers of

direct

indirect

labour

shipping

costs.