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Precision Laboratories Ltd (PLL) evaluates the reaction of materials to extreme increases in temperature. Much of the company's early growth was attributable to government contracts,
Precision Laboratories Ltd (PLL) evaluates the reaction of materials to extreme increases in temperature. Much of the company's early growth was attributable to government contracts, but recent growth has come from expansion into commercial markets. Two types of testing at PLL are heat testing (HT) and Arctic-condition testing (ACT). Currently, all of the budgeted operating costs are collected in a single cost pool. Tom Parker, the management accountant, calculates a uniform cost-driver rate based on the test-hours expected in the next period and marks up this hourly rate by 36% to recover administrative costs and taxes and to earn a profit. Tom is reviewing the hourly charge-out rate. He believes that there is enough variation in the test procedures and cost structure to establish separate cost-driver and charge-out rates at a 36% mark-up. He also believes that the current inflexible rate structure is inadequate in today's competitive environment. After analysing the available data, he divides operating costs into the following three cost pools. Labour and supervision $647 000 Set-up costs $305 000 Power and water $368 000 Tom estimates 186 000 total test-hours for the next period. Test-hours is the cost driver for labour and supervision. The budgeted cost-driver quantity for set-up costs is 513 set-up hours. The budgeted cost-driver quantity for power and water is 9143 machine-hours. Tom estimates that HT uses 60% of the test-hours, 20% of the set-up hours and half of the machine-hours, Compute the charge-out rate for HT based on the new cost-driver rates
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