Market analysis, accounting homework help

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MANAGERIAL ANALYSIS--Ideal Manufacturing

Note: This exercise is on page 880 in Chapter 17 of the text.

CT17-2 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

$1,050,000

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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Explanation & Answer

Kindly see attached file together with the corresponding plagiarism report

Running head: ACTIVITY BASED COSTING ANALYSIS

ACTIVITY BASED COSTING ANALYSIS
(NAME)
(COURSE)
(DATE)

1

ACTIVITY BASED COSTING ANALYSIS

2

Activity based costing analysis is based on the calculation of the price of a service taking
into account the independent cost of all the necessary activities into which the delivered service
can be divided (Hicks, 1992). In this regard, table 1 presents the estimated costs of each of the
four activities carried out by the research and development department at Ideal Manufacturing
Company together with the estimated number of either hours or units spent on each of these
activities.
Table 1. Summary of the data necessary for the ABC analysis

Taking the above data into account, the activity based overhead rate for each of the four
activities would be calculated by dividing the total annual cost of each activity by the number of
hours, designs, products or tests carried out. Taking this into account, the activity based overhead
rate for each activity would be as summarized in table 2.
Table 2. Calculated activity based overhead rate for each of the four activities carried out at the
R&D department

Taking the data presented into account, an internal department requiring of a total of

ACTIVITY BASED COSTING ANALYSIS

3

1,800 hours of marketing analysis, 280 product designs, 10 products and 92 prototype tests
would be of $1,046,800 as shown belo...


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