What is the benefitto Ideal Manufacturing of applying activity-based costing to its R&Dactivity for both in-house and outside charging purposes? (write at last 250words and cite peer reviewed source from library)

MANAGERIAL ANALYSIS

Ideal Manufacturing Company of Sycamore, Illinois, hassupported a research and development (R&D) department that has for manyyears 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 toin-house manufacturing departments (four different product lines), all of whichproduce agricultural/farm/ranch related machinery products.

The department has never sold its services outside, butbecause of its long history of success, larger manufacturers of agriculturalproducts have approached Ideal to hire its R&D department for specialprojects. Because the costs of operating the R&D department have beenspiraling uncontrollably, Ideal’s management is considering entertaining theseoutside approaches to absorb the increasing costs. But, (1) management doesn’thave any cost basis for charging R&D services to outsiders, and (2) itneeds to gain control of its R&D costs. Management decides to implement anactivity-based costing system in order to determine the charges for bothoutsiders and the in-house users of the department’s services.

R&D activities fall into four pools with the followingannual costs.

Market analysis $1,050,000 Product design 2,350,000 Product development 3,600,000 Prototype testing 1,400,000

Activity analysis determines that the appropriate costdrivers 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 500 tests