Test Laboratories does heat testing (HT) and stress testing (ST) on materials and operates at capacity Under its current simple costing system, Hull aggregates all operating costs of $1,275,000 into a single overhead cost pool Hull calculates a rate per test hour of $ 15($ 1,275,000 85, 000 total test hours) HT uses 60,000 test hours, and ST uses 25, 000 test hours Gary O'Loughlin, Hull'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 Hull to lose business O'Loughlin divides Hull's costs into four activity cost categories Particulars Direct labor costs, $ 418,000 These costs can be directly traced to HT, $ 360,000 and ST, $ 58,000 b Equipment related costs (rent, maintenance, energy, and so on), $ 340,000 These costs are allocated to HT and ST on the basis of test hours c Setup costs, $ 396,000 These costs are allocated to HT and ST on the basis of the number of setup hours required HT requires 11,500 setup hours, and ST requires 5,000 set up hours d Costs of designing tests, $ 270,000 These costs are allocated to HT and ST on the basis of the time required to design the tests HT requires 2,500 hours, and ST requires 2,500 hours Requirements 2 Calculate the total cost per test hour for HT and ST for Direct Labor, Equipment, Set Up and Design cost and Explain briefly the reasons why these numbers differ from the $ 15per test hour that Hull 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 Hull's management use the cost hierarchy and ABC information to better manage its business

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Test Laboratories does heat testing (HT) and stress testing (ST) on materials and operates at capacity. Under its current simple costing system, Hull aggregates all

Test Laboratories does heat testing (HT) and stress testing (ST) on materials and operates at capacity. Under its current simple costing system, Hull aggregates all operating costs of $1,275,000 into a single overhead cost pool. Hull calculates a rate per test-hour of $ 15($ 1,275,000/ 85, 000 total test-hours). HT uses 60,000 test-hours, and ST uses 25, 000 test-hours. Gary O'Loughlin, Hull'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 Hull to lose business. O'Loughlin divides Hull's costs into four activity-cost categories.

Particulars

Direct-labor costs, $ 418,000. These costs can be directly traced to HT, $ 360,000

and ST, $ 58,000


b.	Equipment-related costs (rent, maintenance, energy, and so on), $ 340,000

These costs are allocated to HT and ST on the basis of test hours.
c. Setup costs, $ 396,000

These costs are allocated to HT and ST on the basis of the number of setup-hours required. HT requires 11,500 setup-hours, and ST requires 5,000 set- up hours.


d.	Costs of designing tests, $ 270,000

These costs are allocated to HT and ST on the basis of the time required to design the tests. HT requires 2,500 hours, and ST requires 2,500 hours.

Requirements:

2. Calculate the total cost per test-hour for HT and ST for Direct Labor, Equipment, Set-Up and Design cost and. Explain briefly the reasons why these numbers differ from the $ 15per test-hour that Hull

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 Hull's management use the cost hierarchy and ABC information to better manage its business?