- 1 Classify Each Activity Cost As Output Unit Level Batch Level Product Or Service Sustaining Or Facility Sustaining 1 (37.56 KiB) Viewed 497 times
- 1 Classify Each Activity Cost As Output Unit Level Batch Level Product Or Service Sustaining Or Facility Sustaining 2 (92.9 KiB) Viewed 497 times
- 1 Classify Each Activity Cost As Output Unit Level Batch Level Product Or Service Sustaining Or Facility Sustaining 3 (56.73 KiB) Viewed 497 times
Plymouth Test Laboratories does heat testing (HT) and stress testing (ST) on materials and operates at capacity. Under its current simple costing system, Plymouth aggregates all operating costs of S into a single overhead cost pool. Plymouth calculates a rate per test-hour of $($_+_total test-hours). HT uses test-hours, and ST uses test-hours. Gary Cook, Plymouth 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 Plymouth to lose business. Cook divides Plymouth's costs into four activity-cost categories. (Click the icon to view the activity-cost categories.) Read the requirements². Requirement 1. Classify each activity cost as output unit-level, batch-level, product- or service-sustaining, or facility-sustaining. Explain each answer. A cost hierarchy categorizes various activity cost pools on the basis of the different types of cost drivers, or cost-allocation bases, or different degrees of difficulty in determining cause-and-effect (or benefits-received) relationships. Activity-based costing (ABC) systems commonly use a cost hierarchy having four levels. Output unit-level costs are related to the number of units. The cost is required for each unit produced. Batch-level costs are related to a group of units of the product. For example, setup costs are done for a group of units. Product-sustaining costs (service-sustaining costs) are costs used to support individual products regardless of the number of units or batches produced. Facility-sustaining costs are costs that can not be traced to individual products but support the company as a whole. ABC refines a costing system by identifying individual activities as the fundamental cost objects. An activity is an event, task, or unit of work with a specified purpose-for example, designing products, setting up machines, operating machines, and distributing products. In this example we have identified four activities: direct labor, equipment related costs, setup, and design. Each activity has been assigned a cost and a cost-allocation base. There is a seven-step approach to refining a cost system. The first four steps have been completed by the controller of the company. Requirement 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 Plymouth calculated using its simple costing system. Let's begin with step 5 in the process: Compute the rate per unit of each cost-allocation base. Enter the amounts in the formula to determine the rate for each activity. Total activity cost Total allocation base Activity rate per allocation base + Equipment per test hour Setup costs per setup hour per design hour Design costs Now we can complete step 6 (compute the indirect costs allocated to the product) and step 7 (compute the total costs of the product) of the process. Remember, each type of test (HT and ST) requires a different amount of hours for each activity. Equipment hours use test hours, setup uses setup hours, and design uses design hours. The total cost per activity assigned to the product is the number of hours times the activity rate we calculated above. Let's begin by calculating the indirect costs allocated to HT. Calculate the cost of each activity and the total cost of the heat testing. Remember, direct labor was given to you. Heat Test (HT) Hours allocated Total Activity rate x to the activity Cost Direct labor Equipment 5.00 * Setup 25.00 x Design 60.00x Total $
Calculate the cost of each activity and the total cost of the stress testing. Remember, direct labor was given to you. Stress Test (ST) Hours allocated Total Cost Activity rate to the activity Direct labor Equipment $ Setup Design Total Now enter the amounts in the formula to calculate the rate per test-hour for HT. (Round the rate to the nearest cent.) Total HT costs HT test-hours HT Cost per test-hour per test-hour Now enter the amounts in the formula to calculate the rate per test-hour for ST. (Round the rate to the nearest cent.) Total ST costs - ST Cost per test-hour per test-hour ST test-hours The simple costing system uses one cost pool and only one allocation base for the overhead costs. The difference between the simple costing system and ABC is: (1) ABC systems trace more costs as direct costs: (2) ABC systems create homogeneous cost pools linked to different activities; and (3) for each activity-cost pool, ABC systems seek a cost-allocation base that has a cause-and-effect relationship with costs in the cost pool Requirement 3. Explain the accuracy of the product costs calculated using the simple costing system and the ABC system. How might Plymouth's management use the cost hierarchy and ABC information to better manage its business? Refer to the discussions above to determine which costing system will result in more accurate product costs. More accurate product costs lead to better pricing, product-mix decisions, cost reduction, process improvement, product redesign, planning and managing. By categorizing costs into a cost hierarchy, management is able to more accurately determine the cost drivers of indirect costs. 1: Data Table a. Direct-labor costs. These costs can be directly traced to HT. S and ST. $___ Equipment-related costs (rent, maintenance, energy, and so on).$___ b. These costs are allocated to HT and ST on the basis of test-hours G. Setup costs, S These costs are allocated to HT and ST on the basis of the number of setup-hours required. HT requires setup-hours, and ST requires_setup-hours. d. Costs of designing tests. These costs are allocated to HT and ST on the basis of the time required to design the tests. HT requires hours, and ST requires_hours 2: Requirements 1. 2. Classify each activity cost as output unit-level, batch-level, product or service-sustaining, or facility-sustaining. Explain Calculate the cost per test-hour for HT and ST. Explain briefly the reasons why these numbers differ from the per test-hour that Plymouth calculated using its simple costing system. Explain the accuracy of the product costs calculated using the simple costing system and the ABC system. How might Plymouth's management use the cost hierarchy and ABC information to better manage its business? 3: Definition 1. Identify the products that are the chosen cost objects. (HT and ST) 2. Identify the direct costs of the product. (Direct labor) 3. Select the activities and cost-allocation bases to use for allocating indirect costs to products. 4. Identify the indirect costs associated with each cost-allocation base.