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-assignment-help-

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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? (write at last 250 words and cite peer reviewed source from library)

MANAGERIAL ANALYSIS

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 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

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