Reference no: EM132999212

Test Laboratories does heat testing (HT) and stress testing (ST) on materials and operates at capacity. Under its current simple costing system, Laze-Away aggregates all operating costs of $1,190,000 into a single overhead cost pool.

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. Derrick Johnson, Laze-Away'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 mis-costing and mispricing of its services could cause to lose business.

Derrick Johnson divides costs into four activity-cost 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:

Question 1. To improve upon its costing system, what system might Laze-Away Test Laboratories use instead of the simple costing system?

Question 2. Provide Lazy-Away Test Laboratories' updated costing using the refined costing system you suggested in question 1.