Question
Springfield Test Laboratories does heat testing (HT) and stress testing (ST) on materials and operates at capacity. Under its current simple costing system, Springfield aggregates
Springfield Test Laboratories does heat testing (HT) and stress testing (ST) on materials and operates at capacity. Under its current simple costing system, Springfield aggregates all operating costs of $1,120,000 into a single overhead cost pool. Springfield calculates a rate per test-hour of $14 ($1,120,000 80,000 total test-hours). HT uses 54,000 test-hours, and ST uses 26,000 test-hours. Gary Cook, Springfield'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 Springfield to lose business. Cook divides Springfield's costs into four activity-cost categories.
Read the requirements2.
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 | (1) |
b. | Equipment-related costs (rent, maintenance, energy, etc.) | (2) |
c. | Setup costs | (3) |
d. | Costs of designing tests | (4) |
Output unit-level costs are (5)
Batch-level costs are (6)
Service-sustaining costs are (7)
Facility-sustaining costs are (8)
Requirement 2. Calculate the cost per test-hour for HT and ST. Explain briefly the reasons why these numbers differ from the $14 per test-hour that Springfield calculated using its simple costing system.
First, determine the formula used to calculate the cost for each activity in each test type.
| (9) | (10) | = | 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.)
| (11) | (12) | = | 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.)
| (13) | (14) | = | 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:
(15) |
(16) |
(17) |
Requirement 3. Explain the accuracy of the product costs calculated using the simple costing system and the ABC system. How might
Springfield's
management use the cost hierarchy and ABC information to better manage its business?The accuracy of the product costs will be
(18)
with the ABC system instead of the simple costing system. The ABC product costs will
(19)
the utilization of
(20)
resources by both products.Management can use the ABC costs to
(21)
. The cost hierarchy enables management to more accurately determine the cost drivers of
(22)
costs.
1: Data Table
a. | Direct-labor costs, $294,500. These costs can be directly traced to HT,$229,500, and ST,$65,000. |
b. | Equipment-related costs (rent, maintenance, energy, and so on), $320,000. These costs are allocated to HT and ST on the basis of test-hours. |
c. | Setup costs, $360,000. These costs are allocated to HT and ST on the basis of the number of setup-hours required. HT requires14,600 setup-hours, and ST requires3,400 setup-hours. |
d. | Costs of designing tests, $280,000. These costs are allocated to HT and ST on the basis of the time required for designing the tests. HT requires2,500 hours, and ST requires2,500 hours. |
2: Requirements
1. | Classify each activity cost as output unit-level, batch-level, product- or service-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 per test-hour thatSpringfield 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 Springfield's management use the cost hierarchy and ABC information to better manage its business? |
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