Question

Ideal Manufacturing Company 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 performs 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 to outside companies. 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. However, (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 $1,104,000 Product design 2,356,000 Product development 3,192,000 Prototype testing 1,269,000 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 13,800   hours Product design Number of designs 2,480   designs Product development Number of products 80   products Prototype testing Number of tests 470   tests

Compute the activity-based overhead rate for each activity cost pool. Activities Cost Pools Activity-Based Overhead Rates Market analysis $ per hour Product design $ per design Product development $ per product Prototype testing $ per test

How much cost would be charged to an in-house manufacturing department that consumed 1,640 hours of market analysis time, was provided 250 designs relating to 10 products, and requested 99 engineering tests? Total overhead assigned $

How much cost would serve as the basis for pricing an R&D bid with an outside company on a contract that would consume 740 hours of analysis time, require 169 designs relating to 3 products, and result in 73 engineering tests? Total overhead assigned $

Answer 1

The answer has been presented in the supporting sheet. For detailed answer refer to the supporting sheet. For detailed answer refer to the supporting sheet.

Answer Cost 80 Part 1) Activities Market Analysis Product Design Product Development Prototype Testing Total estimated Drivers Activity Based Overhead Rate 1104000 13800 2356000 2480 950 3192000 39900 1269000 470 2700 Thus the final answer is e Activities Market Analysis Product Design 5 Product Development 5 Prototype Testing Activity Based Overhead Rate 80 Per Hour 950 Per Design 39900 Per Product 2700 Per Test 3 Formula Overhead rate = cost / estimated cost drivers

Part 2) Overheads Assigned To In House Manufacturing Department Activities Activity Based Overhead Rd No. of activity Overheads Assigned Market Analysis 80 1640 5 Product Design 950 250 5 Product Development 39900 10 - Prototype Testing 2700 99 3 Total Thus the correct answer Total Overheads assigned = $ 1035000 131200 237500 399000 267300 1035000 e Part 3) Overheads Assigned For outside Bid Activity Based Overhead Ra No. of activity 80 950| 39900 2700 Activities 5 Market Analysis 5 Product Design - Product Development 3 Prototype Testing Total Overheads Assigned 740 169 59200 160550 119700 197100 536550 73 Thus the correct answer - Total Overheads assigned = $ 536550