Orange Test Laboratories does heat testing (HT) and stress testing (ST) on materials and operates at capacity. Under its current simple costing system, Orange aggregates all operating costs of $1,120,000 into a single overhead cost pool.
Orange 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 Lawler, Orange'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 Orange to lose business.
Lawler divides Orange's costs into four activity-cost categories.
(Cáck the icon to view the activity-cost categories)
Read the requirements.
c. Setup costs
d. Costs of designing tests
Batch-level
Service-sustaining
Output unit-level costs are related to the number of units tested, required for each unit tested
Batch-level costs are related to a group of units of the service. They are not related to the number of units tested
Service-sustaining costs are costs used to support individual services regardless of the number of units or batches tested
Facility-sustaining costs are costs that can not be traced to individual services but support the company as a whole.
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 Orange calculated using its simple costing system
First, determine the formula used to calculate the cost for each activity in each test type.
Activity rate $\times$ Activity hours per test type = 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
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 selup-hours required. HT requires 14,600 setup-hours, and ST requires
3,400 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 requires 2,500 hours, and ST
requires 2,500 hours.
