MANAGERIAL ANALYSIS
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 co in-house manufacturing departments (four different produc[ lines), all of which produce agricultural/fa/Ili/ranch related machinery products.
The department has never sold its services outside., but because of its long history of success., lamer 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) managernen[ doesn't have any cost basis for charging R&D services to outsiders. and (2) i[ needs to gain concrol of its R&D costs. Mana.gemenc decides to implement an activity-based costing system in order co determine the charges for both outsiders and the in-house 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 resting 1,400,000
Activicy analysis determines than the appropriate cost drivers and their usage for the four acEivicies are:
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Activities
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Cost Drivers
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Total
Estimated Drivers
15,000 hours
2,500 designs 90 produc [s 500 tests
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Market analysis
Product design
Product development Prototype testing
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Hours of analysis Number of designs Number of products Number of tests
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Instruction:
(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 co 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?