OrangeOrange Test Laboratories does heat testing (HT) and stress testing (ST) on materials and operates at capacity. Under its current simple costing system, OrangeOrange aggregates all operating costs of $1,260,000 into a single overhead cost pool.

OrangeOrange

calculates a rate per test-hour of

$ 14

$1,260,000

/ 90,000

total test-hours). HT uses 50,000 test-hours, and ST uses 40,000 test-hours. Gary CelesteCeleste, OrangeOrange'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

a.	Direct-labor costs, $ 145 comma 000$145,000. These costs can be directly traced to HT, $ 100 comma 000$100,000, andST, $ 45 comma 000$45,000.
b.	Equipment-related costs (rent, maintenance, energy, and so on), $ 540 comma 000$540,000. These costs are allocated to HT and ST on the basis of test-hours.
c.	Setup costs, $ 300 comma 000$300,000. These costs are allocated to HT and ST on the basis of the number of setup-hours required. HT requires 10 comma 00010,000 setup-hours, and ST requires 5 comma 0005,000 setup-hours.
d.	Costs of designing tests, $ 290 comma 000$290,000. These costs are allocated to HT and ST on the basis of the time required to design the tests. HT requires 2 comma 5002,500 hours, and ST requires 2 comma 5002,500 hours.

OrangeOrange

to lose business. CelesteCeleste divides OrangeOrange's costs into four activity-cost categories

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 labor
b.	Equipment-related costs (rent, maintenance, energy, etc.)
c.	Setup costs
d.	Costs of designing tests

Output unit-level costs are

costs that can not be traced to individual services but support the compan

y 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 can not 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 can not 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

costs that can not 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.

Requirement 2. Calculate the cost per test-hour for HT and ST. Explain briefly the reasons why these numbers differ from the

$ 14$14

per test-hour that

OrangeOrange

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 labor
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

OrangeOrange'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

labor

shipping

costs.

1.	Classify each activity cost as output unit-level, batch-level, product- orservice-sustaining, or facility-sustaining. Explain each answer.
2.	Calculate the cost per test-hour for HT and ST. Explain briefly the reasons why these numbers differ from the $ 14$14 per test-hour that OrangeOrange 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 OrangeOrange's management use the cost hierarchy and ABC information to better manage its business?