Chapter 5, Problem 5.17E

ABC, cost hierarchy, service. (CMA, adapted) Vineyard Test Laboratories does heat testing (HT) and stress testing (ST) on materials and operates at capacity. Under its current simple costing system, Vineyard aggregates all operating costs of $1,190,000 into a single overhead cost pool. Vineyard 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 Celeste, Vineyard’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 Vineyard to lose business. Celeste divides Vineyard’s costs into four activity-cost categories.

1. a. Direct-labor costs, $146,000. These costs can be directly traced to HT, $100,000, and ST, $46,000.
2. 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.
3. 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.
4. 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.
5. 1. Classify each activity cost as output unit–level, batch-level, product- or service-sustaining, or facility-sustaining. Explain each answer.

Required

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