Writea paper of no more than 750 words in which you respond to the Broadening Your Perspective 17-2 activity titled “Managerial Perspective” in Ch. 17 of Accounting.
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| BYP17-2 |
MANAGERIAL ANALYSISIdeal 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 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 testing |
1,400,000 |
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Activity analysis determines that the appropriate cost drivers and their usage for the four activities are:
| Activities |
Cost Drivers |
Total 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 |
|
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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 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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