Writea paper of no more than 750 words in which you respond to the Broadening Your Perspective 17-2 activity titled “Managerial Perspective” in Ch. 17 ofAccounting.

 

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 inhouse

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:

 

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

 

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?

(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?