Milton Test Laboratories does heat testing (HT) and stress testing (ST) on materials and operates at capacity. Under its current simple costing system, Milton aggregates all operating costs of $975,000 into a single overhead cost pool. Milton calculates a rate per test-hour of $13 ($975,000 75,000 total test-hours). HT uses 55,000 test-hours, and ST uses 20,000 test-hours. Gary Daley, Milton'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 Milton to lose business. Daley divides Milton's costs into four activity-cost categories. a. Direct-labor costs, $217,000. These costs can be directly traced to HT, $165,000, and ST, $52,000. b. Equipment-related costs (rent, maintenance, energy, and so on), $375,000. These costs are allocated to HT and ST on the basis of test-hours. c. Setup costs, $375,000. These costs are allocated to HT and ST on the basis of the number of setup-hours required. HT requires 10,000 setup-hours, and ST requires 5,000 setup-hours. d. Costs of designing tests, $248,000. These costs are allocated to HT and ST on the basis of the time required for designing the tests. HT requires 2,000 hours, and ST requires 2,000 hours.

Requirement 1. Classify each activity cost as output unit-level, batch-level, product- or service-sustaining, or facility-sustaining. Explain each answer.Requirement 2. Calculate the cost per test-hour for HT and ST. Explain briefly the reasons why these numbers differ from the per test-hour that calculated using its simple costing system. First, determine the formula used to calculate the cost for each activity in each test type.

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