Running head: MANAGEMENT PERSPECTIVE

Management Perspective
Houman Kargar
Professor Clark
ACC/561
November 20, 2014

MANAGEMENT PERSPECTIVE

Management Perspective

A) Activity-based costing will help Ideal Manufacturing Company gain better control of research
and development costs by more accurately costing activities and resources going into R&D
operations. Using activity-based cost methodology, overhead rate for each activity cost pool can
be determined by dividing annual cost of activities by the specific cost driver of the activity. The
overhead rate for market analysis is $70 per hour ($1,050,000/1,500 hrs.). The overhead rate for
product design is $940 per design ($2,350,000/2,500 designs). The overhead rate for product
development is $40,000 per product ($3,600,000/90 products). The overhead rate for prototype
testing is $2,800 per test ($1,40,000/500 tests). Thus, activity-based costing methodologies have
allowed Ideal Manufacturing Company to assess activity-based overhead rate for each particular
cost pool.

B) Using activity-based costing allows Ideal Manufacturing Company to more accurately

determine costs incurred from specific in-house departmental R&D services. Given an in-house
manufacturing department consumed 1,800 hours of analysis time, was provided 280 designs
relating to 10 products, and requested 92 engineering tests; Ideal Manufacturing would use
activity-based costing to determine the appropriate charges. Under such circumstance, R&D
would charge $126,000 for market analysis (1,800 hrs.*$70), $263,200 for product design (280
designs*$940), $400,000 for product development (10 products*$40,000), and $257,600 for
prototype testing (92 tests*$2,800). From these specific computations, Ideal Manufacturing
Company can accurately charge in-house services for these activities.

MANAGEMENT PERSPECTIVE

C) Activity-based costing will help Ideal Manufacturing Company determine appropriate cost
basis for charging R&D services to outside parties. Given an outside company contract would
consume 800 hours of analysis time, require 178 designs relating to 3 products, and requested 70
engineering tests; Ideal Manufacturing would use activity-based costing to price R&D bids.
Under such circumstance, R&D would charge $56,000 for market analysis (800 hrs. *$70),
$167,320 for product design (178 designs*$940), $120,000 for product development (3
products*$40,000), and $196,000 for prototype testing (70 tests*$2,800). From these specific
computations, Ideal Manufacturing Company can accurately use activity-based costing to
formulate an appropriately priced quote on the contractual bid of an external company.

D) Applying activity-based costing to R&D activity for both in-house and outside services
benefits Ideal Manufacturing Company by allowing them to more accurately allocate cost to
products according to the resources used by specific activities. Selling its services to outside
parties is also advantageous to the Ideal Manufacturing Company in absorbing increasing costs
and more accurately measuring the ongoing costs of specific R&D services. In using activitybased costing, the company is able to better price services and save on losses potentially incurred
from the use of more traditional costing methods. By applying an activity-based costing system,
Ideal Manufacturing Company has mitigated the problematic points of costing services of R&D
for in-house and outside parties, as well as increasing control over the functioning cost of the
R&D department.

MANAGEMENT PERSPECTIVE

Reference
Kimmel, P., Weygandt, J., & Kieso, D. (2011). Accounting: Tools for business Decision Making.
(4th ed.). Hoboken, NJ: John Wiley & Sons, Inc.