Classify each activity cost as output unit-level, batch-level, product- or service-sustaining, or facility-sustaining. Explain each answer. Calculate the cost per test-hour for HT and ST. Explain briefly the reasons why these numbers differ from the $16 per test-hour that Holliston calculated using its simple costing system. Explain the accuracy of the product costs calculated using the simple costing system and the ABC system. How might Holliston's management use the cost hierarchy and ABC information to better manage its business? Direct-labor costs, $225,000. These costs can be directly traced to HT, $175,000, and ST, $50,000. Equipment-related costs (rent, maintenance, energy, and so on), $375,000. These costs are allocated to HT and ST on the basis of test-hours. Setup costs, $360,000. These costs are allocated to HT and ST on the basis of the number of setup-hours required. HT requires 10,000 setup-hours, and ST requires 5,000 setup-hours. Costs of designing tests, $240,000. 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 1,500 hours. Holliston Test Laboratories does heat testing (HT) and stress testing (ST) on materials and operates at capacity. Under its current simple costing system, Holliston aggregates all operating costs of $1,200,000 into a single overhead cost pool. Holliston calculates a rate per test-hour of $16 ($1,200,000 = 75,000 total test-hours). HT uses 50,000 test-hours, and ST uses 25,000 test-hours. Gary Cook, Holliston'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 Holliston to lose business. Cook divides Holliston's costs into four activity-cost categories. (Click the icon to view the activity-cost categories.) Read the requirements. Requirement 1. Classify each activity cost as output unit-level, batch-level, product- or service-sustaining, or facility-sustaining. Explain each answer. Cost Item Cost-type a. Direct labor Output unit-level b. Equipment-related costs (rent, maintenance, energy, etc.) Output unit-level c. Setup costs Batch-level d. Costs of designing tests Service-sustaining v 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 $16 per test-hour that Holliston calculated using its simple costing system. First, determine the formula used to calculate the cost for each activity in each test type. x 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) Stress Test (ST) Total Total Cost Cost Direct labor 225,000 60,000 Equipment Setup Design Total Determine the formula to calculate the HT cost per test-hour and enter the amounts to calculate the rate. (Round the rate to the nearest cent.) Total HT costs + = HT Cost per test-hour o | =1 | ner tast-hanr Determine the formula to calculate the ST cost per test-hour and enter the amounts to calculate the rate. (Round the rate to the nearest cent.) Total ST costs + |Total test-hours v|= 5T Costper test-hour = = per test-hour The cost per test-hour for HT and ST differs from the cost per test-hour using the simple rate because: | Requirement 3. Explain the accuracy of the product costs calculated using the simple costing system and the ABC system. How might Holliston's management use the cost hierarchy and ABC information to better manage its business? The accuracy of the product costs will be [higher with the ABC system instead of the simple costing system. The ABC product costs will |better reflect the utilization of |direct | resources by both products. Management can use the ABC costs to |more accurately determine product costs . The cost hierarchy enables management to more accurately determine the cost drivers of |labor costs