Running head: BROADENING YOUR PERSPECTIVE: BYP17-2

Broadening your perspective: BYP17-2

Gabriella Goodfield
ACC/561
November 2, 2015
Myrtle Clark

BROADENING YOUR PERSPECTIVE: BYP17-2

Broadening your perspective: BYP17-2

Introduction
BYP17-2 requires calculating the costs for the research and development department for
special projects. The R&D activities are in four pools. In part A, to calculate the overhead rate.
In part B, to compute charges for in house manufacturing department. Part C, compute cost that
is needed to base the pricing for the R&D bid that is from an external company. Part D is to
explain what the benefit of applying the activity based costing.
BYP 17-2 Ideal Manufacturing Company
Part A) Calculation overhead rate

Activity Cost Pools

Total
Estimated
Overhead

Analysis

$1,050,000

15,000

$70

Design

$2,350,000

2,500

$940

Development

$3,600,000

90

$40,000

Protype

$1,400,000

500

$2,800

Expected Use
of Cost Drivers
per Activity =

Activity based
Overhead Rated

Part B) In house manufacturing development

Activity Cost Pools
Analysis
Design

Cost drivers used

Overhead rates = Cost Assigned

1,800

$70

$126,000

280

$940

$263,200

Development

10

$40,000

$400,000

Protype

92

$2,800

$257,600

Total Overhead assigned

$1,046,800

BROADENING YOUR PERSPECTIVE: BYP17-2

Part C) Chargers to outside Research and Development

Activity Cost Pools

Cost drivers used

Overhead Rates =

Cost Assigned

Analysis

800

$70

$56,000

Design

178

$940

$167,320

$40,000

$120,000

70

$2,800

Development
Testing
Total Overhead assigned

$196,000
$539,320

Part D)
The Activity-Based costing lets the Ideal Manufacturing to recognize their R&D costs that
is from the activities that cause the Costs. Meaning the Activity Based Costing lets the company
to a more in-depth review of the cause that costs have incur. By calculation, the cost on the in
house manufacturing and outside contractor Ideal Manufacturing will be able to see which of the
two would be cheaper
As seen in the calculations for the in house chargers the total cost is at $1,046,800 whereas
the outside R&D contractor total costs is at $539,320. At this point Ideal Manufacturing should
use the outside R&D Contractors to save money.
Activity-Based Costing is An overhead cost-allocation system that allocates overhead to
multiple activity cost pools and assigns the activity cost pools to products or services by means
of cost drivers that represent the activities used(Kimmel, pg. 912). BYP 17-2 shows the student
the importance of the ANC. That at times performing in house manufacturing is at time is the
higher cost way of manufacturing. The exercise showed the outside contractor is the less costly
way to go.
The company will have the knowledge after doing the ABC to trace the activities and the
costs. With this knowledge, the company can set the price for each activity and keep trace of the

BROADENING YOUR PERSPECTIVE: BYP17-2

costs. Once Ideal Manufacturing has set the cost for every activity, they can change the
activities to avert future losses.

Conclusion
BYP17-2 is an excellent exercise to help the student to understand the ABC analysis. The
Ideal Manufacturing exercise show how a company can determine which would have less cost,
in house or outside contractor. In the Ideal Manufacturing cases, the outside contractor did cost
less to do. There will be time that by manufacturing house would cost. Either way to determine
this the ABC has to be done

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

BROADENING YOUR PERSPECTIVE: BYP17-2