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ACC/349 Implementing Activity-Based Costing in R&D Departments: A Case Study of Ideal Manufacturing Company

A case study on implementing Activity-Based Costing (ABC) in the R&D department of Ideal Manufacturing Company.

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    ACC/349 Implementing Activity - Based Costing in R&D Departments: A Case Study of Ideal Manufacturing Company Team C ACC/349 BYP 4 - 2 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 spiralling 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 2,280,000 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: Total Activities Cost Drivers 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 700 tests Instructions (a) Compute the activity - based overhead rate for each activity cost pool. Answer to BYP 4 - 2 (a) Activity - based overhead rate for Market analysis = Total Annual Cost for Market Analysis / Number of Hours of analysis

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