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).

• air turbulence testing (ATT).

• stress testing (SST).

• arctic condition testing (ACT).

• aquatic testing (AQT).

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)* .....$ 420,000

Supervision.............. 72,000

Equipment depreciation.........178,000

Heat.......... ......170,000

Electricity.............. 124,000

Water................ 74,000

Setup ................58,000

Indirect materials ..........104,000

Operating supplies ..........60,000

Total costs .............$1,260,000

Total estimated test hours .......105,000

*All employees are paid the same salary.

The following chart reports Shaw’s analysis of resource usage by test type.

Required
a. Compute the common pool hourly cost and hourly billing rate for Best Test
Laboratories. b. Compute the activity-based hourly cost for each of the five tests performed by Best Test Laboratories.
c. Calculate the activity-based hourly billing rate for each of the five tests performed by
Best Test Laboratories. d. Based on the new hourly cost data, what recommendations would you make to Rick Shaw on the pricing of the company’s fivetests?

Transcribed Image Text:

HTT ATT SST ACT AQT Test pool labor employees Supervision Equipment depreciation Heat Electricity Water Setup Indirect materials Operating supplies Test hours Competitors' hourly billing rates $ 17.50 $19.00 $ 15.50 16.00 $ 20.00 15% $48,000 $22,000 $39,000 $32,000 $37,000 10% 10% 15% 15% 15% 5% 10% 5% 10% 15% 10% 30% 20% 15% 2% 6,500 15,600 31,200 20,600 20,100 10% 25% 20% 1500 10,500 26,250 21,000 15,750