Aerotech International Inc. of Montreal has supported a research and development (R&D) department that for many years
Question:
Aerotech International Inc. of Montreal has supported a research and development (R&D) department that for many years has been the sole contributor to the company's new products. The R&D activity is an overhead cost centre that provides services only to in-house manufacturing departments (four different product lines), all of which produce aerospace-related products.
The department has never sold its services outside, but because of its long history of success, larger manufacturers of aerospace products have approached Aerotech to hire its R&D department for special projects. Because the costs of operating the R&D department have been spiralling uncontrollably, Aerotech's management is considering taking on these outside contracts to absorb the increasing costs. However, managers don't have any cost basis for charging R&D services to outsiders, and they need to gain control of their R&D costs. Management decide to implement an activity-based costing system in order to determine the charges for both outsiders and the in-house users of the department's services.
R&D activities fall into four pools with the following annual costs:
Market analysis...............................$1,050,000
Product development.........................3,600,000
Product design.................................2,350,000
Prototype testing..............................1,400,000
Analysis determines that the appropriate cost drivers and their usage for the four activities are as follows:
Instructions
(a) Calculate the activity-based overhead rate for each activity cost pool.
(b) How much cost would be charged to an in-house manufacturing department that consumed 1,800 hours of market analysis time, was provided with 280 designs relating to 10 products, and requested 92 engineering tests?
(c) How much cost would serve as the basis for pricing an R&D bid with an outside company on a contract that would consume 800 hours of analysis time, require 178 designs relating to three products, and result in 70 engineering tests?
(d) What is the benefit to Aerotech International Inc. of applying activity- based costing to its R&D activity to charge for both in-house and outside services?
Step by Step Answer:
Managerial Accounting Tools for Business Decision Making
ISBN: 978-1118856994
4th Canadian edition
Authors: Jerry J. Weygandt, Paul D. Kimmel, Donald E. Kieso, Ibrahim M. Aly