BYP1?-2 Ideal Manufacturixlg Company of Sycamore, Illinois, has supported a research and de-
velopment (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
agrictilturalffaimfranch 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 [deal to hire its R&D department
for special projects. Because the costs of operating the R&D department have been spiraling un-
controllabl_v, 1deal’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 appnopriate cost drivers and their usage for the four ac-
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 pm-ducts 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 consume-d
1,800 hours of market analysis time, was provided 280 designs relating to 10 products, and
requested 92 engineering tests?
lfc) 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 ITS designs relating to
3 products, and result in Yo engineering tests?
(cl) ‘What is the benefit to Ideal Manufacturing of applying activity-based costing to its R&,D ac-
tivity for both in-house and outside charging purposes?