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Introduction
Ideal Manufacturing Company is located in Sycamore, Illinois and has a
research and development department that for many years has been the
only contributor to the company’s new farm machinery products. This
department only provides services to in-house manufacturing
departments, and they all produce agriculture, farm and ranch related
machine products. The company has never sold to the outside
population but has been long approached by others to do so. Because
the cost of running this department are getting so expensive the
company is now contemplating selling to the outside to help cover some
of the rising cost.
The Four Pools & Costs
The R & D activities fall into four pools of costs and those are: Market
Analysis=\$1,050.000, Product Design=\$2,350.000, Product
Development=\$3,600.000 and Prototype Testing=\$1,400.000. To help
Ideal Manufacturing Company decide if this is something they really
want to do they should first look at the activity-based overhead cost rate
for each of the four activity pools. When we look at Market Analysis with
an annual cost of \$1,050.00 and divide that by 15,000 which is the
number of estimated drivers we get a sum of \$70, for Product Design the
annual cost is \$2.350.000 and the number of estimated drivers is 2,500
which gives us \$940. Product Development has an annual cost of
\$3,600.000 and the estimated drivers are 90 and that gives us \$40,000.
Prototype Testing has an annual cost of \$1,400.000 and the estimated
drivers are 500 which is \$2,800.
In House Manufacturing Department Question B

The amount that would be charged to an in house manufacturing
department that consumed 1,800 hours of market analysis time,
provided 280 designs related to 10 products and they requested 92
engineering test would come out to be: Market analysis=\$583.33,
product design=\$839.28, product development=\$360,000 and prototype
testing=\$15,217.39.
Basis for Pricing Outside Company Bid
The cost that would serve as the basis for an bid for an outside company
on a contract that would consume 800 hours of analysis time, 178
designs related to 3 products and resulting in 70 engineering testing
would total: Market Analysis=\$13,125, product design=\$13,202.24,
product development=\$1,200.000, and prototype testing=\$20,000.
The Benefits of Adding Activity Based Costing/Conclusion
In conclusion, I find that the benefits of adding and applying activity-
based costing for both in-house and outside charging purposes is that
the company would see a tremendous profit and rise in revenue to assist
with the rising cost of the department. This allows the company to see
the cost of each line item based on the product or service it utilizes for
both inside and outside. This also allows for a better usage and
understanding of the overall overhead cost. In my opinion this is most
definitely a benefit for the company and they can’t go wrong by
implementing this system into their business practices. All companies
want to continue to thrive and grow and if this is indeed what Ideal
Manufacturing wants then implementing this system would contribute to
longevity and prosperity for them for years to come.

References:
Accounting: Tools for Business Decision Making, 4e Chapter 17.
Kimmel, Paul D., 2011.
http://www.accounting4management.com/limitations_of_activity_based_
costing.htm

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