Broadening Your Perspective 17-2 Coursework

Coursework Instructions:

Write a paper of no more than 750 words in which you respond to the Broadening Your Perspective 17-2 (BYP17-2 Ideal Manufacturing Company of Sycamore, Illinois) activity titled "Managerial Perspective" in Ch. 17 of Accounting. Complete the exercise in Excel or Word and submit it to me for grading as with any other paper. (See also the enclosed file)

Wiley PLUS Assignment Paper

Objectives:

BYP17-2

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?

Coursework Sample Content Preview:

Broadening Your Perspective 17-2 (BYP17-2): Activity Based Costing
Name:
Course: ACC/ 561
Instructor
Date:

Compute the activity-based overhead rate for each activity cost pool
Activity based overhead rate for Market analysis- with hours of analysis as the cost driver
=Total Annual Cost for Market Analysis/ Number of hours analysis
=1,050,000/ 1500
$ 70 per hour
Activity based overhead rate for Product Design- with number of designs as cost driver
=Total Annual Cost for Product Design/ Number of Designs
=2,350,000/ 2500
=$ 940 per design
Activity based overhead rate for Product Development- with number of products as cost driver
=Total Annual Cost for Product Development/ Number of products
=3,600,000/ 90
=$ 40,000 per product
Activity based overhead rate for Prototype Testing- with number of tests as the cost driver
= Total Annual Cost for Prototype Testing/ Number of tests
=1,400,000/ 500
=$ 2800 per test
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?
The total cost charged to the in house manufacturing department is $ 1, 0468, 000, and it is the aggregate cost borne by the department from its activities. The cost of each activity is the product of the consumption level of the activity and the activity based overhead rate pertaining to that activity. Thus, this is computed as follows;
ActivitiesLevel ofActivity basedTotal CostConsumptionOverhead rateMarket analysis1,80070126000Product Design280940263200Product Development1040,000400000Prototype Testing 922,800257600Total Cost allocated toin house manufacturing department1046800How 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?
Similar to the costs involved in the in-house manufacturing department, the cost pricing for an outside company is the aggregate costs of the various activities. The computation below shows that it is $ 539, 320, which is also the break even point.
ActivitiesLevel ofActivity basedTotal CostConsumptionOverhead rateMarket analysis8007056000Product Design178940167320Product Development340,000120000Prototype Testing 702,800196000Total Cost allocated tooutside company539320
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?
Activity- Based Costing relates to allocation of overhead costs across various multiple cost pools, followed by assigning of products and services through use of cost drivers (Kimmel et al...

Updated on January 26, 2024

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