Conway Mountain Analysis Offers Agriculture and Environmental Assays

Essay

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 at a rate of $70 per testing hour. S testing uses 5,000 hours and PR uses 10,000 hours. The company is trying to determine whether a better costing structure can be established. The controller has identified the following costs:
(1) Salaries and wages of laboratory techs are $600,000 (based on 45% for S and 55% for PR testing).
(2) Equipment related overhead like depreciation, maintenance, utilities, and insurance amounts to $150,000, with a cost driver of number of test 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, based on the time required to design the tests. S testing requires 3,250 hours and P testing requires 1,750 hours.
Required:
(a) Calculate the cost per test hour for S and PR using an improved costing system.
(b) Explain briefly the reasons why these costs are different from the $70 per test-hour under the current costing system.