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 comma 260 comma 000 into a single overhead cost pool. Orange calculates a rate per test-hour of $ 14 ($ 1 comma 260 comma 000 / 90 comma 000 total test-hours). HT uses 50 comma 000 test-hours, and ST uses 40 comma 000 test-hours. Gary Cook , 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. Cook divides Orange 's costs into four activity-cost categories.

a. Direct-labor costs, $145,000. These costs can be directly traced to HT, $100,000, and ST, $45,000.

b. Equipment-related costs, $540,000.These costs are allocated to HT and ST on basis of tesred hours.

c. Setup costs, $300,000. These costs are allocated to HT and ST on the basis of the number of setup-hours required. Ht equires 10,000setup-hours, and ST requires 5,000 setup-hours.

d. Costs of designing tests, $290,000. These cost are allocated to HT an ST on the basis of the time required to design the tests. HT requires 2,500 hours and ST requires 2,500 hours.

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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. 3. Explain the accuracy of the product costs calculated using the simple costing system and the ABC system. How might Orange's management use the cost hierarchy and ABC information to better manage its business?