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Ideal Manufacturing 1050000

Price: $2.50

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

Activities    Cost Drivers    Total Estimated Drivers 
Market analysis  Hours of analysis  15000 hours
Product design  Number of designs  2500 designs  
Product development  Number of products  90 products  
Prototype testing  Number of tests  500 tests  

(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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