ACC 561 Week 4

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ACC 561 Week 4,

Acc 561 Week 4 Managerial Analysis

2-Team Assignment Costing and Decision Making.xls

3-Variable and Absorption Costing Team A.xls

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 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

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

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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Description

ACC 561 Week 4,

Bilici and Dalci (2008) state “the basic premise of ABC is products consume activities, activities consume resources and resources consume costs” (p. 63). The cost of a product comprises of direct labor, direct material, and overheads.  Direct material and direct labor can be traced more easily to a particular product, but this is not the case for overheads, which is not easy to trace to a particular product when determining its product cost. Activity-based costing helps in allocating cost to the product according to the resources used by each activity (See Appendix A).

The In-House Manufacturing Department

The annual costs for R&D activities are broken up as follows:

Market analysis $1,050,000
Product design $2,350,000
Product development $3,600,000
Prototype testing $1,400,000

 

R&D spends a total of $8,400,000.

The cost drivers and their usage for the related activities:

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

 

When determining activities cost to the in-house manufacturing department, the cost per driver unit must be calculated (See Appendix B). The 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.  The number of activities is multiplied by the cost per unit to obtain the dollar amount value cost per activity (See Appendix B). The in-house manufacturing department should be charged $1,046,800 or 12.46% of the total annual R& D related costs.

Pricing an R&D Bid

In order to find how much cost would serve as the basis for pricing an R&D bid, it is necessary to perform the following breakdown:

R&D cost activities are broken up as follows:

Market analysis $1,050,000
Product design $2,350,000
Product development $3,600,000
Prototype testing $1,400,000
Total Cost $8,400.00

 

The cost drivers and usage for activities will aid in calculating the cost per driver unit and determining activities costs to the in-house manufacturing department, as well as the future outsider. To accurately obtain the dollar amount value cost per activity, the numbers of activities are multiplied by the cost per unit.            


 

Activity Cost Pools Cost Drivers Expected use of Cost Drivers per Activity Expected use of Cost Drivers per Product/ In-house Expected use of Cost Drivers per Product/The Outsiders
Market Analysis Hours of Analysis 15,000 Hours 1,800 13,200
Product Design Number of Designs 2,500 Designs 280 2,220

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