MANAGERIAL ANALYSIS

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 (tour different product

lines), all of which produce agr:iculturaVfarm,/ranch related machinery products.

The department has never sold its services outside, but because of its long history of

success, larger manufacturers of agicultural 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 tlese

outside approaches to absorb the increasing costs. But, (1) management doesnt 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 deparlrnent’s services.

R&D activities fall into four pools with the following annual costs.

Market analysis

Product design

.

Product development

Prototype testing

$1,0s0,000

2,280,000

3,600,000

1.400.000

Activity analysis determines that the appropriate cost drivers and their usage for the

four activities are:

Activities Cost Ilrivers

Total

Estimated Drivers

Market analysis

Product design

Product development

Prototype testing

Instru.ctions

(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 confract 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 activit-v for both in-house and outside charging purposes?

.

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