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:
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:
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|