Managerial Perspective Analysis - Ideal Manufacturing Company

ACC 561–Managerial Perspective Analysis - Ideal Manufacturing Company

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 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