The work focuses on YP17-2 Ideal Manufacturing Company of Sycamore, Illinois, which 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 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. The company's Management decides to put into practice an activity-based costing system to establish the charges for both outsiders and the inhouse users of the department's services.
Managerial Analysis
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
Total
Activities Cost Drivers Estimated Drivers
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
(a) Compute the activity-based overhead rate for each activity cost pool
Activity-based overhead rate = total budget overhead / basis
= 1,050,000 / 15,000
= $70 per hour (Market Analysis)
Activity-based overhead rate = total budget overhead/basis
= 2,350,000 / 2,500
= $940 per design (Product Design Number)
Activity-based overhead rate = total budget overhead/basis
= 3,600,000 /
=$40,000 per product (Product development number)
Activity-based overhead rate = total budget overhead/basis
= 1,400,000 / 500
= $2,800 per test (Number of tests)
(b) How much cost charged to an in-house manufacturing department that consumed 1,800 hours of market analysis time, provided 280 designs relating to 10 products, and 92 engineering tests requests?
=Total Annual Cost for Market Analysis / Number of Hours of Analysis
= 1,050,000 / 1800
= $583.333 per hour (Market Analysis)
= Total Annual Cost for Product Design / Total Number of Designs
= 2,350,000 / 280
= $8,392.86 per design (Product Design)
= Total Annual Cost for Product Development / Total Number of Products
= 3,600,000 / 10
= $360,000 per product (Product Development)
= Total Annual Costs for Number of Tests / Total Number of Tests
= 1,400,000 / 92
=$15,217.39 per test (Prototype Testing)
(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?
=Total Annual Cost for Market Analysis / Number of Hours of Analysis
= 1,050,000 / 800
= $5,898.88 per hour (Market Analysis)
= Total Annual Cost for Product Design / Total Number of Designs
= 2,350,000 / 178
= $13,202.25 per design (Design Development)
= Total Annual Cost for Product Development / Total Number of Products
= 3,600,000 / 3
= $1,200,000 per product (Product Development)
= Total Annual Costs for Number of Tests / Total Number of Tests
= 1,400,000 / 70
= $20,000 per test (Prototype Testing)
(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?
Ideal Manufacturing experience various advantages in relation to implementation of the activity-based costing system for R&D activity for in-house and outside charging purposes. The essential advantage is the ability of the organization to experience more accurate and substantive costing of products and services with consumers and distribution channels (Lutilsky & Dragija, 2012). Accurate costing is cost effective because of the organization ability to eliminate errors within the market and industry of operation. Another critical benefit is the ability and capacity of the Ideal Manufacturing to understand the overhead costing effectively and efficiently. Understanding of the overhead costing is critical towards integration of new mechanism and models with the aim of achieving competitive advantage in the market and industry of operation. Understanding of the overhead costing is also crucial towards enhancing interaction between the organization and other shareholders and stakeholders.
Ideal manufacturing incorporates management techniques and tools such as six sigma and other improvement programs with the aim of improving the operations of the organization. Management tools operate effectively with activity-based costing system or technique hence offering the opportunity for the organization to maximize its revenues and profits at the end of the year (Ittner et al., 2002). Activity-based costing system is crucial towards unveiling wastes and other non-value added activities. Activity-based costing system mirrors operations of an organization. Ideal Manufacturing applies this approach of costing to ensure that the operations add value thus improving the ability of the organization to achieve competitive advantage in the market and industry of operation. Activity-based costing system is adequate for understanding the goals and objective of benchmarking (Tibesku et al., 2013).
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