PROBLEM Domino Labs is a freestanding facility that conducts two kinds of tests for nearby physician practices. Test 1 is ordered in large volumes and can be processed in large batches. Test 2 is ordered in much smaller quantities and is processed in smaller batches. In addition, to ensure quality for test 2, Domino must purchase the necessary reagents in small quantities. Domino has a single facility where it conducts all its tests. Its major direct cost is labor. However, there is a substantial amount of overhead in the lab's purchasing and material handling activities. Many of these activities are highly automated, especially material handling. The expected direct costs for a single test of each type are as follows: Test 1 Test 2 Direct material $0.50 $1.00 Direct labor $3.00 $3.00 Other direct costs $1.00 $1.00 Domino's budget for the upcoming year includes overhead of $660,000 million, which currently is attached to each test on the basis of machine hours. However, Domino's controller believes that this approach may be providing misleading information. She has developed the following analysis of the budgeted overhead costs: Activities Purchasing Material Handling Total Overhead Costs Cost Driver Number Purchase order 600 POs Batches 900 Batches Cost $ 300,000 $360,000 $ 660,000 Budget data for producing the two tests throughout the upcoming year are as follows: Test Conducted Machine Hours Purchase Orders Batches Test 1 400,000 200,000 200 250 Test 2 100,000 50,000 400 650 Total 500,000 250,000 600 900 PROBLEM Domino Labs is a freestanding facility that conducts two kinds of tests for nearby physician practices. Test 1 is ordered in large volumes and can be processed in large batches. Test 2 is ordered in much smaller quantities and is processed in smaller batches. In addition, to ensure quality for test 2, Domino must purchase the necessary reagents in small quantities. Domino has a single facility where it conducts all its tests. Its major direct cost is labor. However, there is a substantial amount of overhead in the lab's purchasing and material handling activities. Many of these activities are highly automated, especially material handling. The expected direct costs for a single test of each type are as follows: Test 1 Test 2 Direct material $0.50 $1.00 Direct labor $3.00 $3.00 Other direct costs $1.00 $1.00 Domino's budget for the upcoming year includes overhead of $660,000 million, which currently is attached to each test on the basis of machine hours. However, Domino's controller believes that this approach may be providing misleading information. She has developed the following analysis of the budgeted overhead costs: Activities Purchasing Material Handling Total Overhead Costs Cost Driver Number Purchase order 600 POs Batches 900 Batches Cost $ 300,000 $360,000 $ 660,000 Budget data for producing the two tests throughout the upcoming year are as follows: Test Conducted Machine Hours Purchase Orders Batches Test 1 400,000 200,000 200 250 Test 2 100,000 50,000 400 650 Total 500,000 250,000 600 900
