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Managerial Analysis

622 words - 3 pages

Managerial Analysis

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 ...view middle of the document...

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

(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?

In-House Manufacturing Department


Activity Cost Pools
Cost Drivers Used
X Activity-Based
Overhead Rates
=
Cost Assigned

Market analysis
Product design
Product development
Prototype testing 1,800 Hours
  280 Designs
   10 Products
   92 Tests $ 70
$ 940
$40,000
$ 2,800 $ 126,000
 263,200
 400,000
  257,600
Total overhead assigned $1,046,800

(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?

Outside Contract Costs


Activity Cost Pools
Cost Drivers Used
X Activity-Based
Overhead Rates
=
Cost Assigned

Market analysis
Product design
Product development
Prototype testing 800 Hours
178 Designs
  3 Products
 70 Tests $ 70
$ 940
$40,000
$ 2,800 $ 56,000
 167,320
 120,000
 196,000
Total overhead assigned $539,320

(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?ABC has greater control over costs because it has identified it’s R&D costs by the activities that it is associated with. Activity based costs help to keep costs realistic

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