Broadening Your Perspective 17-2
Shacorra Hall
ACC 561
July 16, 2015
Professor Jennifer Melvin
BROADENING YOUR PERSPECTIVE 17-2 / 1Broadening Your Perspective 17-2
Abstract
The topic of this assignment is to elaborate on Activity Based Costing (ABC) and how it will aid the Ideal Manufacturing Company in keeping its costs at an effective level. According to “Investopedia” (2014), “Activity based costing (ABC) is a system which 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 remainder of this assignment will detail computations of activity-based overhead for different activity cost pools, calculation of charges for an in-house manufacturing department, how much cost would serve as the basis for pricing a Research and Development (R & D) bid, and the benefits to Ideal Manufacturing Company of applying activity based costing to its R & D activity for both in-house and outside charging purposes.
A: Computations for Activity-Based Overhead for Cost Pools
To discover the activity-based overhead for market analysis, one must divide the market analysis amount by the hours of analysis. Thus, $1,050,000/15,000 hrs. =70.00 hours. Next, the calculation of product design is computed by dividing the product design amount by the number of designs. Thus, $2,350,000/2,500 designs= 940. Product development is computed by dividing product development by the number of products. Thus, 3,600,000/90 products= 40,000. Finally, the calculations for prototype testing are performed by dividing the prototype testing by the number of tests. Thus, 1,400,000/500 tests= 2,800. The activity-based overhead rate for market analysis is 70.00 hours, product design is 940, product development is 40,000, and prototype testing is 2,800.
B: Cost Charged for In-House Manufacturing Department
This portion comprises the calculations for the question “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?” The market analysis is calculated by utilizing the previous market analysis figure and multiplying it by the 1,800 hours. Thus, 70 * 1,800= $126,000 cost. Product design is solved by multiplying the previous calculation of 940 by 280. Thus, 940 * 280= $263,200 in costs. The product development is solved by multiplying the figure 40,000 by 10. Thus, 40,000 * 10= $400,000 in costs. Then, the prototype pre-calculation of 2,800 is multiplied by 92 engineering tests. Thus, 2,800 * 92= $257,600 in costs. To arrive at a total sum all costs are added, $126,000 + $263,200 + $400,000 + $257,000= $1,046,800.
C: How Much cost Serves as the Basis
This section focuses on the question “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?” For each of the following calculations the original activity-based overhead for cost pools is taken and multiplied for the newly requested numbers. Thus, 800 hours * 70= $56,000 in costs. Product design is solve by multiplying 940 by 178 designs. Thus, 178 designs * 940= $167,320 in costs. Product development is computed as 3 multiplied by 40,000. Thus, 3 products * 40,000= $120,000 in costs. Prototype testing is solved by multiplying 70 by 2,800. Thus, 70 engineering tests * 2,800= $196,000. Total costs amount to $56,000 + $167,320 +$120,000 + $196,000= $539,320.
D: Benefits to Ideal Manufacturing Company
The benefits for Ideal Manufacturing Company of applying activity-based costing are substantial. A primary reason for applying activity-based costing is price. Utilizing activity-based costing will display a more accurate selling price of the product and the possible loss the company may take. It is possible that Ideal Manufacturing will be charged a higher selling price without the practice of activity-based costing. This would not be idyllic for Ideal Manufacturing, as their competitors could obtain smaller selling prices. Ultimately applying activity-based costing aids the company to ensure the company is utilizing the precise cost for each product and offers Ideal Manufacturing Company with a more exact selling price.
Conclusion
In conclusion, this task addressed activity-based costing. The computations for activity-based overhead for four cost pools were solved. Costs charged for an in-house manufacturing department was discovered. The amount of cost, which serves as a basis for pricing R&D, was examined. The benefits to Ideal Manufacturing Company for implementing activity-based costing were given. Activity-based costing is a valuable tool for Ideal Manufacturing Company.
References
Investopedia.(2014).Retrieved from
Investopedia. (2014). Activity Based Costing. Retrieved from
Investopedia. (2014). Activity Based Costing. Retrieved from