Week 4 Team Assignment Costing and Decision Making - Ideal Manufacturing
Company of Sycamore, Illinois, has supported a research and development
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? (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?
ACC 561 Ideal Manufacturing
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 inhouse users of the
department's services. R&D activities fall into four pools with the
following annual costs.
Activity
Cost
Driver
Annual Costs Total estimated drivers
Market Analysis
Hours of
analysis $1,050,000
15,000
Product
Design
Number of
designs 2,350,000 2,500
Product
Development Number
of products 3,600,000 90
Prototype Testing
Number of
tests 1,400,000
500
TUTORIAL PREVIEW
(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
Product development
Prototype testing
|
$1,050,000
2,350,000
3,600,000
1,400,000
|
|
15,000 Hours
2,500 Designs
90 Products
500 Tests
|
|
$70 per hour
$940 per design
$40,000 per product
$2,800 per test
|
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