Ideal Manufacturing Company: Broadening your Perspective
Broadening Your Prospective 17-2
Michael Orcutt
ACC/561
4 September 2015
Mr. Joe Primiano
Broadening Your Perspective 17-2
The Ideal Manufacturing Company wants to be able to track its costs and keep their cost at correct levels. The example provided in the “Broadening Your Perspective” exercise provides the tools to do just that, keep Ideal Manufacturing Companies costs at correct levels. Activity based costing is defined as “An activity based costing (ABC) system 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 exercise is broken up into 4 sections, A thru D.
A- This question wants you to complete an activity based overhead rate for each activity cost. Using the correct formula to accomplish this is important to coming up with the correct overhead rate. Based on the chart provided in the text book, to come up with a figure for market analysis we will want to divide the market analysis amount by the number of market analysis hours. This is 1,050,000/15,000=$70.00. For finding the activity based overhead rate for product designs we will want to follow the same formula as we did for the market analysis. This is calculation is 2,350,000/2,500 = $940. For Product development, you would divide the product development number by the number of products which would be: 3,600,000/90 = $40,000. Finally the last activity to be calculated is Prototype testing divided by the Number of Tests: 1,400,000/500= $2,800.
B- The next question that needs to be answered is, “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 request 92 engineering tests?” (Kimmel, 2011). Based on the chart in the textbook, the market analysis would be calculated by 70 multiplied by 1,800 hours
Michael Orcutt
ACC/561
4 September 2015
Mr. Joe Primiano
Broadening Your Perspective 17-2
The Ideal Manufacturing Company wants to be able to track its costs and keep their cost at correct levels. The example provided in the “Broadening Your Perspective” exercise provides the tools to do just that, keep Ideal Manufacturing Companies costs at correct levels. Activity based costing is defined as “An activity based costing (ABC) system 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 exercise is broken up into 4 sections, A thru D.
A- This question wants you to complete an activity based overhead rate for each activity cost. Using the correct formula to accomplish this is important to coming up with the correct overhead rate. Based on the chart provided in the text book, to come up with a figure for market analysis we will want to divide the market analysis amount by the number of market analysis hours. This is 1,050,000/15,000=$70.00. For finding the activity based overhead rate for product designs we will want to follow the same formula as we did for the market analysis. This is calculation is 2,350,000/2,500 = $940. For Product development, you would divide the product development number by the number of products which would be: 3,600,000/90 = $40,000. Finally the last activity to be calculated is Prototype testing divided by the Number of Tests: 1,400,000/500= $2,800.
B- The next question that needs to be answered is, “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 request 92 engineering tests?” (Kimmel, 2011). Based on the chart in the textbook, the market analysis would be calculated by 70 multiplied by 1,800 hours
References: Investopedia. (2014). Activity Based Costing. Retrieved from http://www.investopedia.com/terms/a/abc.asp Kimmel, Paul D., and Jerry J. Weygandt. Accounting: Tools for Business Decision Making. 4e [ed.]. ed. Hoboken, N.J.: Wiley, 2011. Print.