Milton Test Laboratories does heat testing (HT) and stress testing (ST) on materials and operates at capacity. Under its current simple costing system, Milton aggregates all operating costs of $1,190,000 into a single overhead cost pool. Milton calculates a rate per test-hour of $17 ($1,190,000 + 70,000 total test-hours). HT uses 40,000 test-hours, and ST uses 30,000 test-hours. Gary Sarsfield, Milton'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 information, any miscosting and mispricing of its services could cause Milton to lose business. Sarsfield divides Milton's costs into four activity-cost categories. (Click the icon to view the activity-cost categories.) Read the requirements. c. Setup costs d. Costs of designing tests Batcn-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 $17 per test-hour that Milton calculated using its simple costing system. First, determine the formula used to calculate the cost for each activity in each test type. Activity rate 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 126000 Equipment 375000 Setup 375000 248000 Design Total 1124000 Requirements 1. Classify each activity cost as output unit-level, batch-level, product-or service-sustaining, or facility-sustaining. Explain each answer. 2. Calculate the cost per test-hour for HT and ST. Explain briefly the reasons why these numbers differ from the $17 per test-hour that Milton calculated using its simple costing system. 3. Explain the accuracy of the product costs calculated using the simple costing system and the ABC system. How might Milton's management use the cost hierarchy and ABC information to better manage its business? Print Done