Managerial Perspective

Managerial Perspective

Managerial Analysis

BYP17-2 Ideal Manufacturing Company of Sycamore, Illinois, has supported a research and development (R&D) department that has for many years been the sole contributor to the company's new farm machinery products. The R&D activity is an overhead cost center that provides services only to in-house manufacturing departments (four different product lines), all of which produce agricultural/farm/ranch related machinery products. The department has never sold its services outside, but because of its long history of success, larger manufacturers of agricultural products have approached Ideal to hire its R&D department for special projects. Because the costs of operating the R&D department have been spiraling uncontrollably, Ideal's management is considering entertaining these outside approaches to absorb the increasing costs. But, (1) management doesn't have any cost basis for charging R&D services to outsiders, and (2) it needs to gain control of its R&D costs. Management decides to implement an activity-based costing system in order to determine the charges for both outsiders and the in-house users of the department's services (Demeere, 2009). 

R&D activities fall into four pools with the following annual costs.

Annual Costs of R&D Activities

Market Analysis

$1,050,000.00

Product Design

$2,350,000.00

Product Development

$3,600,000.00

Product Testing

$1,400,000.00

 Activity analysis determines that the appropriate cost drivers and their usage for the four activities are: (Demeere, 2009).

Cost Drivers

Estimated Drivers

Hours of Analysis

15000

Number o Designs

2500

Number of Products

90

Number of Tests

500

 

Instructions

(a) Compute the activity-based overhead rate for each activity cost pool (Turney, 1992).

(b) How much cost would be charged to an in-house manufacturing department that consumed (Turney, 1992).

1,800 hours of market analysis time, was provided 280 designs relating to 10 products, and

requested 92 engineering tests?

(c) How much cost would serve as the basis for pricing an R&D bid with an outside company

on a contract that would consume 800 hours of analysis time, require 178 designs relating to

3 products, and result in 70 engineering tests?

(d) What is the benefit to Ideal Manufacturing of applying activity-based costing to its R&D activity for both in-house and outside charging purposes?

Part (a) Compute the activity-based overhead rate for each activity cost pool.

Cost Drivers

Estimated Drivers

 Calculation

Result

Hours of Analysis

15000

1050000/15000

70

Number o Designs

2500

2350000/2500

940

Number of Products

90

3600000/90

40000

Number of Tests

500

1400000/500

2800

(b) How much cost would be charged to an in-house manufacturing department that consumed (Yahya-Zadeh, 2011).

1,800 hours of market analysis time, was provided 280 designs relating to 10 products, and (Yahya-Zadeh, 2011).

requested 92 engineering tests?

Cost Drivers

Computation

Result

Hours of Analysis

1800

(1050000/15000)*1800

126000

Number o Designs

280

(2350000/2500)*280

263200

Number of Products

10

(3600000/90)*10

400000

Number of Tests

92

(1400000/500)*92

257600

(c) How much cost would serve as the basis for pricing an R&D bid with an outside company (Demeere, 2009).

on a contract that would consume 800 hours of analysis time, require 178 designs relating to (Demeere, 2009).

3 products, and result in 70 engineering tests?

Cost Drivers

Computation

Result

Hours of Analysis

800

70*800

56000

Number o Designs

178

940*178

167320

Number of Products

3

40000*3

1200000

Number of Tests

70

2800*70

196000

(d) What is the benefit to Ideal Manufacturing of applying activity-based costing to its R&D activity for both in-house and outside charging purposes?

The benefit of applying the activity based costing to research and development department of the Ideal Manufacturing Company will allocate the overheads on the basis of relevant cost drivers which will result in setting the correct selling price of the ...