ABC, cost hierarchy, service. Vineyard Test Laboratiories does heat testing (HT)

Question

ABC, cost hierarchy, service. Vineyard Test Laboratiories does heat testing (HT) and stress testing (ST) on materials and operates at capacity. Under its current simple costing system, Vineyard aggreegates all operating costs of $1,190,000 into a single overhead cost pool. Vineyard calculates a rate per test-hour of $17 ($1,190000 / 70,000 total test-hours). HT uses 40,000 test-hours, and ST uses 30,000 test hours. Gary Celeste, Vineyard's controller, beleives 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 misconsting and mispricing of its services could cause Vineyard to lose business. Celeste divides Vineyard's costs into four activity-cost categories.

a. Direct-labor costs, $146,000. These costs can be directly traced to HT, $100,000, and ST, $46,000.

b. Equipment-related costs (rent, maintenance, energy, and so on), $350,000. These costs are allocated to HT and ST on the basis of test-hours.

c. Setup costs, $430,000. These costs are allocated to HT and ST on the basis of the number of setup-hours required. HT requires 13,600 setup-hours and ST requires 3,600 set-up hours.

d. Costs of designing tests, $264,000. These costs are allocated to HT and ST on the basis of the time required for designing tests. HT requires 3,000 hours, and ST requires 1,400 hours.

1a. Calculate the cost per test-hour for HT. (Round answer to two decimal points) 1b. Calculate the cost per test-hour for ST. (Round answer to two decimal points)

Explanation / Answer

1a. $20.50

1b. $12.33

HT ST Activity Cost Category Costs $ Activity Base Total Activity Base Activity Rate $ Activity Base Usage Total Cost $ Activity Base Usage Total Cost $ Direct labor costs 146000 Direct NA NA NA 100000 NA 46000 Equipment-related costs 350000 Test-hours 70000 5 40000 200000 30000 150000 Setup costs 430000 Setup-hours 17200 25 13600 340000 3600 90000 Costs of designing tests 264000 Designing test-hours 4400 60 3000 180000 1400 84000 Total Costs $ 1190000 820000 370000 Number of test-hours 40000 30000 Cost per test-hour $ 20.50 12.33

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