ACC 561– Ideal Manufacturing Company

| July 29, 2018

ACC 561–Managerial Perspective Analysis – Ideal Manufacturing Company


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:

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


(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?

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