Ideal Manufacturing Company has supported a research and development (R&D) department that has for many years been the sole contributor to the company’s new farm machinery products. The R&D activity is an overhead cost center that performs services only to in house manufacturing departments (four different product lines), all of which produce agricultural/farm/ranch related machinery products. The department has never sold its services to outside companies. But, because of its long history of success, larger manufacturers of agricultural products have approached Ideal to hire its R&D department for special projects. Because the costs of operating the R&D department have been spiraling uncontrollably, Ideal’s management is considering entertaining these outside approaches to absorb the increasing costs. However, (1) management doesn’t have any cost basis for charging R&D services to outsiders, and (2) it needs to gain control of its R&D costs. Management decides to implement an activitybased costing system in order to determine the charges for both outsiders and 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 design .....................................2,350,000
Product development .........................3,600,000
Prototype testing .................................1,400,000

Activity analysis determines that the appropriate cost drivers and their usage for the four activities are:

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Activities Market analysis Product design Product development Prototype testing Cost Drivers Hours of analysis Number of designs Number of products Number of tests Total Estimated Drivers 15,000 hours 2,500 designs 90 products 500 tests