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.
R&D activities fall into four pools with the following annual costs.
Market analysis
$1,050,000
Product design
2,350,000
Product
development 3,600,000
Prototype testing
1,400,000
Activity analysis
determines that the appropriate cost drivers and their usage for the four
activities are:
Activities Cost
Drivers Total Estimated Driver
Market analysis
Hours of analysis 15,000 hours
Product design
Number of designs 2,500 designs
Product
development Number of products 90 products
Prototype testing Number
of tests 500 tests
Instructions
(a)Compute the
activity-based overhead rate for each activity cost pool.
(b) How much cost would be charged to an in-house manufacturing department that consumed 1,800 hours of market analysis time, was provided 280 designs relating to 10 products, and requested 92 engineering tests?
(b) How much cost would be charged to an in-house manufacturing department that consumed 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?
TUTORIAL PREVIEW
BYP
17-2
(a) Computation of activity-based overhead
rate:
Activity
Cost Pools
|
Total
Estimated
Overhead
|
÷
|
Expected
Use of
Cost Drivers
Per
Activity
|
=
|
Activity-Based
Overhead
Rates
|
||
Market analysis
Product design
|
$1,050,000
2,350,000
|
15,000 Hours
2,500 Designs
|
$70 per hour
$940 per design
|
File name: BYP17-2 ideal manu.doc File type: .doc PRICE: $9
