As part of the managerial analysis exercise 17.2 the Ideal Manufacturing Company is reviewed. The company uses an R & D department to help innovate different machinery products that the business produce. However recently the R & D department is spirally uncontrollably with cost, the business has to configure whether to find a different approach or not (John Wiley & Sons, Inc. 2011).
Thus the following exercises are completed to understand how to determine what pricing decisions to make. Exercise 17.2- A
In this part of the exercise the activity-based overhead is configured for every activity cost item. There are four activities which are mentioned in the exercise; market analysis, product design, product development, and prototype testing. Each have an annual cost; market analysis-annual cost is $1,050,000, product design annual cost is-$2,350,000, product development annual cost is $3,600,000, and prototype testing annual cost is $1,400,000 (John Wiley & Sons, Inc. 2011) . Each have estimated drivers; Market analysis estimated drivers is 15,000 hours, product design estimated drivers is 2,500 designs, product development estimated drivers is 90 products, and prototype testing estimated drivers is 500 tests (John Wiley & Sons, Inc. 2011).
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To configure the activity-based overhead rate for each activity the following calculation is configure, activity cost estimated overhead divided by the cost drivers will equal the activity-based overhead rate. Thus the activity-based overhead rate for each is, Market analysis – $70
Product Design – $940
Product development -$40,000
Prototype testing – $2,800
Exercise 17.2- B
In this part of the exercise the following questioned is asked, 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 test (John Wiley & Sons, Inc. 2011).
The amount that is charged to an in-house manufacturing department would be calculated by multiply the overhead rate to each activity that is conducted. Thus market design would be 126,000, product design is 263,200, product development is 400,000 and prototype testing is 257,600. Then all cost are added together to gain the charge for the in-housing manufacturing department for a total of $1,046,800. Exercise 17.2- C
In the next part of the exercise the following question is asked, 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 (John Wiley & Sons, Inc. 2011)? The amount that is charged to an outside manufacturing department would be calculated by multiply the overhead rate to each activity that is conducted. Thus market design would be 56,000, product design is 167,320, product development is 120,000 and prototype testing is 196,000. Then all cost are added together to gain the charge for the outside manufacturing department for a total of $539,320. Exercise 17.2- D
The last part of the exercised ask, “What is beneficial to Ideal Manufacturing of applying activity-based costing to its R & D activity for both in-house and outside charging purposes?” (John Wiley & Sons, Inc. 2011).
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The benefits of using activity-based costing allow the business to make decisions in regards to price of its farm machinery products. This creates an understanding of what type of price is to be allocated to forecast the amount of profit margins the business can gain but still remain competitive. Thus determining which type of R & D will need to be used in order to make profit margin that is desired. Another benefit to use of activity based costing also provides the business the ability to reduce or increase certain activities that meets the needs of business in order to retain cost desired. This assures the business that with calculated costing that it will help to make decisions in which activities to eliminate.
References
John Wiley & Sons, In. (2011).
Accounting, 4E, Exercise 17-2. Retrieved from: www.ecampus.phoenix.edu/wileyassignment
