Ideal Manufacturing Company Ideal Manufacturing Company has supported a research and development department that has contribute to a company’s new farm machinery products. The research and development company has provided services only to internal manufacturing departments. The company has never provided services externally. This managerial analysis will explain the activity base overhead, activity cost pool, how to implement each activity to help determine the charges for external and internal department services.
Activity base cost Activity base cost is “an approach for allocating overhead to multiple activity cost pools, and it then assigns the activity cost pools to products and services by means of cost drivers” (Kimmel, Weygandt, & Kieso, 2011, p. 891). Activity is the event that is taking place in that particular setting. Activity cost pool is the overhead cost attributed to a distinct type of activity for example ordering materials or setting up production. A cost driver “is any factor or activity that has a direct cause-effect relationship with the resources consumed” ( (Kimmel, Weygandt, & Kieso, 2011, p. 891).
The example above gives insight on how companies make decision about the labor and production they will need according to their overhead. According to the research and development activities in BYP 17-2 they divided the activities into four pools market analysis, product design, product development, and prototype testing. Each of them had an annual cost that is calculated by the annual cost divided by the total estimated drivers, which will give the total number of hours. The cost that would be charged to the internal manufacturing department on the bases of 1,800 hours or market analysis time, 280 designs relating to 10 products and requested 92 engineering test. The cost is 146,800 million. The pricing for research and development 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 test, equal to 530,320 million. Benefit to Ideal Manufacturing of activity based costing
Benefit of ABC The primary benefit of activity based costing for the research and development of this company is more accurate product costing. Activity based costing leads to more cost