Question

Green Test Laboratory (GTL) performs heat testing and stress testing on materials and operates at full capacity. Under its current simple costing system, GTL aggregates all operating costs of $2,404,000 into a single cost pool. GTL calculates a rate per test-hour of $18.78, ($2,404,000/128,000 total tests-hours). Heat testing uses 80,000 test-hours and stress testing uses 48,000 test-hours. Lee Chang, GTL’s management accountant, believes that there is enough variation in test procedures and cost structures to establish separate costing and billing rates for heat testing and stress testing. The market for test services is becoming increasingly competitive. Without this information, any incorrect costing and pricing of its services could cause GTL to lose business. Lee divides GTL’s costs into four activity cost categories as follows:

1. Direct labour costs, $450,000. These costs can be directly traced to heat testing, $350,000, and to stress testing, $100,000.
2. Equipment related costs (e.g. rent, maintenance, energy), $750,000. These costs are allocated to heat and stress testing on the basis of test hours.
3. Set up costs, $700,000. These costs are allocated to heat and stress testing on the basis of the number of set up hours required. Heat testing requires 13,500 set up hours and stress testing requires 4,000 set up hours.
4. Costs of designing tests, $504,000. These costs are allocated to heat and stress testing on the basis of the time required to design the tests. Heat testing requires 4,200 design hours, and stress testing requires 2,100 design hours.

a) Calculate the cost per test hour for heat testing and for stress testing.

Answer 1

Calculate requirement as follows: A 1 Particulars 2 Direct Labor 3 Equipment related cost (Based on test hours) 4 Setup cost (Based on setup hours) 5 Design cost (based on design hours) 6 Total Cost allocated 7 Test Hours Required 8 Cost per Test Hour $ $ $ $ $ B Heat Test 3,50,000 $ 4,68,750 $ 5,40,000 $ 3,36,000 $ 16,94,750 $ 80000 21.18$ с Stress Test 1,00,000 2,81,250 1,60,000 1,68,000 7,09,250 48000 14.78 S Calculations: A B с 1 Particulars Heat Test Stress Test 2 Direct Labor 350000 100000 3 Equipment related cost (Based on test hours) =750000/(80000+48000)*80000 = 750000/(80000+48000)*48000 4 Setup cost (Based on setup hours) =700000/(13500+4000)*13500 =700000/(13500+4000)*4000 5 Design cost (based on design hours) =504000/4200+2100)*4200 =504000/(4200+2100)*2100 6 Total Cost allocated =SUM(B2:B5) =SUM(C2:C5) 7 Test Hours Required 80000 48000 8 Cost per Test Hour =B6/B7 =C6/07