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    Activity-based overhead rate

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    Directions: Please note the template assist capturing the numerical data. Be sure to add the narrative explanation and supporting discussion for each component of the case. Prepare 250 - 300 word response to Case BYP 4-2.

    Managerial Analysis
    BYP4-2
    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 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 $2,280,000
    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:

    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 700 tests

    Instructions
    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 consumed 1,800 hours of market analysis time, was provided 280 designs relating to 10 products, and requested 92 engineering tests?
    C.) 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?
    D.) 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?

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    Solution Preview

    Prepare 250 - 300 word response to Case BYP 4-2.

    Managerial Analysis
    BYP4-2
    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 ...

    Solution Summary

    This provides the steps to calculate the activity-based overhead rate

    $2.49

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