MANAGERIAL ANALYSIS
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 (tour different product
lines), all of which produce agr:iculturaVfarm,/ranch related machinery products.
The department has never sold its services outside, but because of its long history of
success, larger manufacturers of agicultural 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 tlese
outside approaches to absorb the increasing costs. But, (1) management doesnt 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 deparlrnent’s services.
R&D activities fall into four pools with the following annual costs.
Market analysis
Product design
Product development
Prototype testing
$1,0s0,000
2,280,000
3,600,000
1.400.000
Activity analysis determines that the appropriate cost drivers and their usage for the
four activities are:
Activities Cost Ilrivers
Total
Estimated Drivers
Market analysis
Product design
Product development
Prototype testing
Instru.ctions
(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 confract 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 activit-v for both in-house and outside charging purposes?