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 cast 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 Celest, 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 cost 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 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. Required – Show all calculations a) Calculate the cost per test-hour for HT and ST using ABC, (hint: cost of heat testing, $20.16 per hour). b) Explain briefly the reasons why these numbers differ from the $18 per test-hour that Halifax had calculated using its existing costing system.
Process Costing
Process costing is a sort of operation costing which is employed to determine the value of a product at each process or stage of producing process, applicable where goods produced from a series of continuous operations or procedure.
Job Costing
Job costing is adhesive costs of each and every job involved in the production processes. It is an accounting measure. It is a method which determines the cost of specific jobs, which are performed according to the consumer’s specifications. Job costing is possible only in businesses where the production is done as per the customer’s requirement. For example, some customers order to manufacture furniture as per their needs.
ABC Costing
Cost Accounting is a form of managerial accounting that helps the company in assessing the total variable cost so as to compute the cost of production. Cost accounting is generally used by the management so as to ensure better decision-making. In comparison to financial accounting, cost accounting has to follow a set standard ad can be used flexibly by the management as per their needs. The types of Cost Accounting include – Lean Accounting, Standard Costing, Marginal Costing and Activity Based Costing.
Question 1
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 cast 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 Celest, 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 cost 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 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.
Required – Show all calculations
a) Calculate the cost per test-hour for HT and ST using ABC, (hint: cost of heat testing,
$20.16 per hour).
b) Explain briefly the reasons why these numbers differ from the $18 per test-hour that
Halifax had calculated using its existing costing system.
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