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Managerial Analysis BYP17-2

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Managerial Analysis BYP17-2
a)
The activity-based overhead rates for each activity cost pool are as calculated below:
Market Analysis
Cost Driver - Hours of Analysis
Estimated Drivers = 15,000 hours
Annual Market Analysis Cost = $1,050,000
Hence overhead rate per hour = $1,050,000/15,000 = $70 per hour
Product Design
Cost Driver – Number of designs
Estimated Drivers = 2,500 designs
Annual Product Design Cost = $2,350,000
Hence overhead rate per design = $2,350,000/2,500 = $940 per design
Product Development
Cost Driver – Number of products
Estimated Drivers = 90 products
Annual Product Development Cost = $3,600,000
Hence overhead rate per product = $3,600,000/90 = $40,000 per product
Prototype Testing
Cost Driver – Number of tests
Estimated Drivers = 500 tests
Annual Prototype Testing Cost = $1,400,000
Hence overhead rate per test = $1,400,000/500 = $2,800 per test
b)

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To calculate the total cost to be charged to the in-house manufacturing department we first obtain
the costs incurred under the different activity cost pools. The costs incurred under the different
activity cost pools is obtained by multiplying the number of drivers of the activity consumed and
the activity-based overhead rate for the cost pool as shown below:
Market Analysis
Overhead rate per hour = $70 per hour
No of hours of market analysis = 1,800 hours
Hence total overhead cost = $70 * 1,800 = $126,000
Product Design
Overhead rate per design = $940 per design
No of product designs provided = 280 designs
Hence total overhead cost = $940 * 280 = $263,200
Product Development
Overhead rate per product = $40,000 per product
No of products developed = 10 products
Hence total overhead cost = $40,000 * 10 = $400,000
Prototype Testing
Overhead rate per test = $2,800 per test
No of engineering tests conducted = 92 tests
Hence total overhead cost = $2,800 * 92 = $257,600
Thus total cost to be charged to in-house manufacturing department
= $126,000 + $263,200 + $400,000 + $257,600
=$1,046,800
c)
To calculate the price to be charged to the outside company for the R&D bid we first obtain the
costs incurred under the different activity cost pools. The costs incurred under the different

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activity cost pools is obtained by multiplying the number of drivers of the activity consumed and
the activity-based overhead rate for the cost pool as shown below:
Market Analysis
Overhead rate per hour = $70 per hour
No of hours of market analysis = 800 hours
Hence total overhead cost = $70 * 800 = $56,000
Product Design
Overhead rate per design = $940 per design
No of product designs provided = 178 designs
Hence total overhead cost = $940 * 178 = $167,320
Product Development
Overhead rate per product = $40,000 per product
No of products developed = 3 products
Hence total overhead cost = $40,000 * 3 = $120,000
Prototype Testing
Overhead rate per test = $2,800 per test
No of engineering tests conducted = 70 tests
Hence total overhead cost = $2,800 * 70 = $196,000
Thus the price to be charged to the outside company for the R&D bid
= Total Overhead costs to be incurred for the four activity cost pools
= $56,000 + $167,320 + $120,000 + $196,000
=$539,320
d)
The activity-based costing method helps a company to accurately determine the product cost as it
focuses on the cause and effect relation between costs and activities consumed with respect to
production of a good. At the same time as the overhead costs incurred for different activity cost

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