MMZ Laboratories does heat testing (HT) and stress testing (ST) on materials and operates at capacity. Under its current simple
costing system, MMZ aggregates all operating costs of $1,190,000 into
a single overhead cost pool. MMZ 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. Selim, MMZ’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
MMZ to lose business. Selim divides MMZ’s costs into four activitycost categories.
a) Direct-labor costs, $146,000. These costs can be directly traced
to HT, $100,000, and ST, $46,000.
b) Equipment-related costs (rent, maintenance, energy, and so on),
$350,000. These costs are allocated to HT and ST on the basis of
test-hours.
c) Setup costs, $430,000. These costs are allocated to HT and ST on
the basis of the number of setup hours required. HT requires
13,600 setup-hours, and ST requires 3,600 setup-hours.
d) Costs of designing tests, $264,000. These costs are allocated to
HT and ST on the basis of the time required for designing the
tests. HT requires 3,000 hours, and ST requires 1,400 hours.
Required:
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 MMZ calculated using its simple costing system.