Best Test Laboratories was founded 25 years ago to evaluate the reaction of mate
ID: 341116 • Letter: B
Question
Best Test Laboratories was founded 25 years ago to evaluate the reaction of materials to extreme increases in temperature. Much of the company's early growth was attributable to government contracts to test the suitability of weapons, transportation equipment, and clothing for use in arid desert regions. Recent growth has come from diversification and expansion into commercial markets. Environmental testing at Best Test now includes: heat testing (HTT) stress testing (SST) aquatic testing (AQT) air turbulence testing (A e arctic condition testing (ACT Currently, all the company's budgeted operating costs are collected in a common overhead pool. All of the estimated testing hours are collected in another common pool. One rate per test hour is used to estimate the cost of all five types of testing. In determining the sales price, this hourly rate is marked up by 45% to cover administrative expenses, taxes, and profit. Rick Shaw, Best Test's operations engineer, believes that there is enough variation in the test procedures and cost structure to establish separate costing and billing rates. After analyzing the following data, he has recommended that new rates be put into effect at the beginning of Best Test's fiscal year The budgeted total costs for the coming year are as follows Test pool labor (10 employees) Supervision Equipment depreciation Heat Electricity Water Setup Indirect materials Operating supplies $420,000 72,000 178,000 170,000 124,000 74,000 58,000 104,000 60,000 Total costs Total estimated test hours 105,000Explanation / Answer
Best Test Laboratories
Common pool hourly cost = total cost/total test hours
Total cost = $1,260,000
Total hours = 105,000
Cost per test hour = $1,260,000/105,000 = $12 per test hour
Hourly billing rate = hourly rate + 45% of hourly rate
= $12 + 45% of 12 = $17.40 per test
HTT
Cost Pool
Total Activity Cost
Usage/Proportion
Activity Rate
Activity Cost
Test pool labor
$420,000
3 employees
$42,000
$126,000
Supervision
$72,000
40%
-
$28,800
Equipment Depreciation
$178,000
-
$48,000
$48,000
Heat
$170,000
50%
-
$85,000
electricity
$124,000
30%
-
$37,200
Setup
$58,000
20%
-
$11,600
Indirect materials
$104,000
$16,500
Operating Supplies
$60,000
10%
-
$6,000
Total cost
$359,100
Billing Rate –
Total cost
$359,100
Test hours
31,500
Cost per test hour
$11.40
Add: 45% mark up
$4.56
Billing Price
$15.96
Competitor’s price $17.50
Cost Pool
Total Activity Cost
Usage/Proportion
Activity Rate
Activity Cost
Test pool labor
$420,000
2 employees
$42,000
$84,000
Supervision
$72,000
15%
-
$10,800
Equipment Depreciation
$178,000
-
$22,000
$22,000
Heat
$170,000
5%
-
$8,500
electricity
$124,000
10%
-
$12,400
Setup
$58,000
15%
-
$8,700
Indirect materials
$104,000
$15,600
Operating Supplies
$60,000
10%
-
$6,000
Total cost
$168,000
Billing Price –
Total cost
$168,000
Test hours
10,500
Cost per test hour
$16.00
Add: 45% mark up
$7.20
Billing Price
$23.20
Competitor’s price $19 per hour
Cost Pool
Total Activity Cost
Usage/Proportion
Activity Rate
Activity Cost
Test pool labor
$420,000
2 employees
$42,000
$84,000
Supervision
$72,000
15%
-
$10,800
Equipment Depreciation
$178,000
-
$39,000
$39,000
Heat
$170,000
5%
-
$8,500
electricity
$124,000
10%
-
$12,400
Water
$74,000
20%
$14,800
Setup
$58,000
30%
-
$17,400
Indirect materials
$104,000
$31,200
Operating Supplies
$60,000
25%
-
$15,000
Total cost
$233,100
Test hours
26,250
Cost per test hour
$8.88
Billing Price –
Total cost
$233,100
Test hours
26,250
Cost per test hour
$8.88
Add: 45% mark up
$3.99
Billing Price
$12.88
Competitor’s price $15.50 per hour
Cost Pool
Total Activity Cost
Usage/Proportion
Activity Rate
Activity Cost
Test pool labor
$420,000
1 employee
$42,000
$42,000
Supervision
$72,000
15%
-
$10,800
Equipment Depreciation
$178,000
-
$32,000
$32,000
Heat
$170,000
30%
-
$51,000
electricity
$124,000
40%
-
$49,600
Water
$74,000
20%
$14,800
Setup
$58,000
15%
-
$8,700
Indirect materials
$104,000
$20,600
Operating Supplies
$60,000
20%
-
$12,000
Total cost
$241,500
Test hours
21,000
Cost per test hour
$11.50
Billing price –
Total cost
$241,500
Test hours
21,000
Cost per test hour
$11.50
Add: 45% mark up
$5.18
Billing Price
$16.68
Competitor’s price per hour $16
Cost Pool
Total Activity Cost
Usage/Proportion
Activity Rate
Activity Cost
Test pool labor
$420,000
2 employee
$42,000
$84,000
Supervision
$72,000
15%
-
$10,800
Equipment Depreciation
$178,000
-
$37,000
$37,000
Heat
$170,000
10%
-
$17,000
electricity
$124,000
10%
-
$12,400
Water
$74,000
60%
$44,400
Setup
$58,000
20%
-
$11,600
Indirect materials
$104,000
$20,100
Operating Supplies
$60,000
35%
-
$21,000
Total cost
$258,300
Test hours
15,750
Cost per test hour
$16.40
Billing price per hour –
Total cost
$258,300
Test hours
15,750
Cost per test hour
$16.40
Add: 45% mark up
$7.38
Billing Price
$23.78
Competitor’s price $20 per hour
Tests
HTT
ATT
SST
ACT
AQT
Traditional costing method-
hourly cost per test
$12
$12
$12
$12
$12
hourly billing rate
$17.40
$17.40
$17.40
$17.40
$17.40
Competitor's hourly rate
$17.50
$19
$15.50
$16
$20
Activity Based Costing method -
Hourly cost per test
$11.40
$16
$8.88
$11.50
$16.40
hourly billing rate
$15.96
$23.20
$12.88
$16.68
$23.78
Competitor's hourly rate
$17.50
$19
$15.50
$16
$20
On comparison, the activity based costing method provides more accurate and nearer pricing to competitor’s hourly cost per test for all the individual test, unlike the traditional costing method, which shows larger difference compared to competitor’s price.
Hence, activity based costing provides more realistic pricing model for Best Test Laboratories.
HTT
Cost Pool
Total Activity Cost
Usage/Proportion
Activity Rate
Activity Cost
Test pool labor
$420,000
3 employees
$42,000
$126,000
Supervision
$72,000
40%
-
$28,800
Equipment Depreciation
$178,000
-
$48,000
$48,000
Heat
$170,000
50%
-
$85,000
electricity
$124,000
30%
-
$37,200
Setup
$58,000
20%
-
$11,600
Indirect materials
$104,000
$16,500
Operating Supplies
$60,000
10%
-
$6,000
Total cost
$359,100
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.