Question: Halifax Test Laboratories does heat testing HT and stress testing

Halifax Test Laboratories does heat testing (HT) and stress testing (ST) on materials. Under its current costing system, Halifax aggregates all operating costs of $1,440,000 into a single overhead cost pool. Halifax calculates a rate per test-hour of $18 ($1,440,000  80,000 total test-hours). HT uses 50,000 test hours and ST uses 30,000 test-hours. Gary Celeste, Halifax's controller, believes that there is enough variation in test procedures and cost structures to establish separate costing and billing rates. The market for test services is very competitive, and without this information, any miscosting and mispricing could cause Halifax to lose business. Celeste breaks down Halifax's costs into four activity-cost categories.
1. Direct labour costs, $288,000. These costs can be directly traced to HT, $216,000, and ST, $72,000.
2. Equipment-related costs (rent, maintenance, energy, and so on), $480,000. These costs are allocated to HT and ST based on test-hours.
3. Setup costs, $420,000. These costs are allocated to HT and ST based on the number of setup hours required. HT requires 13,500 setup-hours and ST requires 4,000 setup-hours.
4. Costs of designing tests, $252,000. These costs are allocated to HT and ST based on the time required to design the tests. HT requires 2,800 hours and ST requires 1,400 hours.
1. Classify each of the activity costs as output unit-level, batch-level, product- or service sustaining, or facility-sustaining. Explain your answers.
2. Calculate the cost per test-hour for HT and ST using activity-based costing (ABC).
Explain briefly the reasons why these numbers differ from the $18 per test-hour that Halifax had calculated using its existing costing system.
3. Explain the cost differences and the accuracy of the product costs calculated using the existing and the ABC systems. How might Halifax's management use the cost hierarchy and ABC information to manage its business better?

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  • CreatedJuly 31, 2015
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