Reference no: EM132754005

Question - Conway Mountain Analysis offers agriculture and environmental assays. Its Soil Division performs testing on soil (S), as well as examines for the presence of pesticide residue (PR). Aggregated operating costs for the division are $1,050,000 based on a single overhead pool allocated at a rate of $70 per testing hour. S testing uses 5,000 testing hours and PR uses 10,000 testing hours. The company is trying to determine whether an improved costing system (with multiple cost pools and cost drivers) can be established. The controller has identified the following costs:

(1) Salaries and wages of laboratory techs are $600,000, with an allocation rate of 45% for S testing and 55% for PR testing (cost driver is salary/wage cost).

(2) Equipment related overhead like depreciation, maintenance, utilities, and insurance amounts to $150,000, with a cost driver of number of testing hours.

(3) Setup costs are $120,000 assigned based on 10,000 total setup hours. S testing requires 4,200 setup hours and PR testing requires 5,800 setup hours.

(4) Costs of test designs amount to $180,000, assigned based on the time required to design the tests. S testing requires 3,250 design hours and P testing requires 1,750 design hours.

Required - (assume all estimated costs and estimated activity volumes are the same as actuals):

(a) Calculate the cost per test hour for S and PR using an improved costing system.

(b) Explain why these costs are different from the $70 per testing hour under the current costing system.