Broadening Your Prospective 17-2
4 September 2015
Mr. Joe Primiano
Broadening Your Perspective 17-2
The Ideal Manufacturing Company wants to be able to track its costs and keep their cost at correct levels. The example provided in the “Broadening Your Perspective” exercise provides the tools to do just that, keep Ideal Manufacturing Companies costs at correct levels. Activity based costing is defined as “An activity based costing (ABC) system recognizes the relationship between costs, activities and products, and through this relationship assigns indirect costs to products less arbitrarily than traditional methods..” (Investopedia, 2014). The exercise is broken up into 4 sections, A thru D.
A- This question wants you to complete an activity based overhead rate for each activity cost. Using the correct formula to accomplish this is important to coming up with the correct overhead rate. Based on the chart provided in the text book, to come up with a figure for market analysis we will want to divide the market analysis amount by the number of market analysis hours. This is 1,050,000/15,000=$70.00. For finding the activity based overhead rate for product designs we will want to follow the same formula as we did for the market analysis. This is calculation is 2,350,000/2,500 = $940. For Product development, you would divide the product development number by the number of products which would be: 3,600,000/90 = $40,000. Finally the last activity to be calculated is Prototype testing divided by the Number of Tests: 1,400,000/500= $2,800.
B- The next question that needs to be answered is, “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 request 92 engineering tests?” (Kimmel, 2011). Based on the chart in the textbook, the market analysis would be calculated by 70 multiplied by 1,800 hours which comes out to a cost of $126,000. By multiplying the overhead cost of product design by 280 you would come up with the total cost which is $263,200. The same calculation is made for product development based on the overhead rate of 40,000 multiplied by 10 products which comes out to $400,000. Finally the same equation holds true for prototype testing with an overhead rate of 2,800 multiplied by 92 engineer tests to come up with $257,600 in costs. These figures total a sum of $1,046,800 for this phase of the project.
C- The question for this section is, “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?”(Kimmel, 2011). This equation is similar to the above equation where we simply take the contract hours multiplied by the amount of overhead. The following calculations for each phase of the project are based on this equation: Analysis- 800 * $70 = $56,000
Product Design- 178 * $940 = $167,320
Product Development- 3 * $40,000 = $120,000
Prototype Testing- 70 * $2,800 = $199,000
Total R&D bid- $539,320
D- Using activity based costing for both outside and in-house charging will yield a more accurate selling process and product loss. If Ideal Manufacturing did not use this costing method it is possible that Ideal would be charged a higher selling price. The negative factor in being charged higher selling prices is that Ideal could lose a competitive edge since there competition, if using the more efficient costing, could get lower selling prices. Activity based costing is the best method for Ideal Manufacturing to show accurate accounting practices for each activity, giving them a better perspective of where manufacturing problems might lie due to increased cost in a specific area.
References: Investopedia. (2014). Activity Based Costing. Retrieved from http://www.investopedia.com/terms/a/abc.asp
Kimmel, Paul D., and Jerry J. Weygandt. Accounting: Tools for Business Decision Making. 4e [ed.]. ed. Hoboken, N.J.: Wiley, 2011. Print.
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