Managerial Perspective: 17-2
May 1, 2014
University of Phoenix
Case study 17-2 in Accounting: Tools for Business Decision Making asks the reader to analyze the Ideal Manufacturing Company as it decides to expand their services to outside agencies that want to use their tool in evaluating its costs using activity based costing, which is a two-step process to calculate overhead costs. The first step is to assign overhead costs to activity cost pools, instead of departments, as is the practice in traditional costing The second step is to use cost drivers to allocate overhead to the correlating activity. A cost driver is any factor which has a direct relationship with resources consumed. In this particular scenario, Ideal Manufacturing has been successful in its research and development department for manufacturing agricultural machinery. They recently recognized that their research and ...view middle of the document...
The scenario in the case study proposes that the number of drivers for each activity cost pool for manufacturing in-house requires 1800 hours in market analysis, 280 hours in product design, 10 products, and 92 tests. In calculating the number of drivers by its corresponding overhead rate from Table 2, the total cost of manufacturing in house is $1,046,800. If an external company plans to contract research and development services by Ideal manufacturing based on the number of drivers in Table 4, the cost for Ideal is $539,320
IN-HOUSE | NUMBER OF DRIVERS | # of Drivers * Rate= COST |
Market Analysis | 1800 x 70 | 126000 |
Product Design | 280 x 940 | 263200 |
Product Development | 10 x 40000 | 400000 |
Prototype Testing | 92 x 2800 | 257600 |
| Total Cost | 1046800 |
OUTSOURCE | NUMBER OF DRIVERS | # of Drivers * Rate= COST |
Market Analysis | 800 x 70 | 56000 |
Product Design | 178 x 940 | 167320 |
Product Development | 3 x 40000 | 120000 |
Prototype Testing | 70 x 2800 | 196000 |
| Total Cost | 539320 |
The benefit of using activity based costing is Ideal Manufacturing can accurately identify costs for each activity and pinpoint where costs are exceedingly high. They have a better idea on which activity needs improvement. In terms of determining price to service external companies, Ideal Manufacturing is able to provide a more accurate job estimate and increase their profits.
Kimmel, P. D., Weygandt, J. J., & Kieso, D. E. (2011). Accounting: Tools for business decision making (4th ed.). NJ: John Wiley & Sons.