Broadening Perspective: Managerial Analysis

Ideal Manufacturing Company is a company that is based out of Sycamore, Illinois, which has sustained a company that does research and production of farm related equipment. The company has been manufacturing the farming equipment for a number of years. Ideal Manufacturing has been the single supplier to outside manufacturing companies that are looking to hire research and development companies for special projects. The research and development department happenings have included an overhead cost center that delivers their services to the internal manufacturing departments. In-house the department’s costs have risen to an ultimate high, which has led to Ideal Manufacturing to begin to reflect on the idea of letting a much larger manufacturing company to be responsible for the hiring and the departments de elopement of special projects. There are four various types merchandise lines that are involved which is the market analysis, product design, product development, and prototype testing. Each one of these departments is designed to help create ranch, agronomic, and farmstead related type of machinery products.
The research and development department has yet to sell its services to external organizations; however due to the extended past of achievements, bigger companies that also produce agronomic products have contacted Ideal Manufacturing Company has been contracted for the development and research of very specific assignments. The increasing prices that are associated with running the research and development department have been increasing rapidly over time. Ideal Manufacturing Company’s administration is contemplating accepting the There has been various offers from multiple outside organizations to deal Manufacturing for the purpose of taking in the swelling costs. Ideal Manufacturing Company’s administration does not have any cost foundation for charging researching and development department services to external companies. The administration also must re-evaluate and regulate the cost stemming from the research and development department. The administration has resolved to begin using an activity-based costing system in order to define and regulate the cost for both internal and external clients for the research and development department’s services.
The goal of this essay is to perform a managerial analysis in research and development department within the Ideal Manufacturing Company. Within the paper calculations have been made on the activity-based overhead rate for every activity cost pool. To determine what price would be applied to internal industrial sector that expended a specific number of hours for the purpose of market analysis, assuming the sector was provided select designs relating to a fixed number of yields, and required an exact number of engineering examinations. A determination of what price would serve as the foundation for appraising an research and development department proposal with an external corporation on a agreement that would require a specific number of periods for analysis time, necessitate select designs relating to a fixed number yields, and produce a specific number of engineering assessments. The benefits for Ideal Manufacturing should the organization begin using activity-based costing to its research and development department activity for both internal/external billing matters.
Analysis
It is important for the Ideal Manufacturing Company to know exactly what and how resources are being used by each activity pool.
“The overall objective of ABC in service firms is no different than it is in a manufacturing company. That objective is to identify the key activities that generate costs and to keep track of how many of those activities are performed for each service provided (by job, service, contract, or customer)” (Kimmel, Weygandt, & Kieso, 2011 p. 905).
Using provided information (see Table 1 on p.5.) the activity-based overhead rate for each internal department can be calculated by means of dividing the annual cost by expected use of cost drivers per activity. (See Table 2 on p.5.). The administration can perform further analysis and determine how much cost should be charged to an internal manufacturing department multiplying the activity-based overhead rate (See Table 1 on p.5.) by the total estimated drivers for example 1,800 hours of market analysis time, was provided 280 designs relating to 10 products, with requested 92 engineering test and then totaling them together (See Table 3 on p. 5.). If the formula is followed correctly the administration can see the cost for internal research and development the total overhead cost would be 1,046,800. Using the same formula calculations show for external departments the total overhead cost would be 539,000 (See Table 4 on p. 6.) if cost drivers were 800 hours of market analysis time, was provided 178 designs relating to 3 products, with requested 70 engineering test.
Conclusion
The Ideal Manufacturing Company will benefit from continued use of activity-based costing. The administration was and will be able to accurately determine total overhead cost. This will allow the company to keep track of the money spent by research and development for internal departments. It will also prevent an internal department from taking resources from other departments in the organization. This will stop overhead cost from spiraling out of control as they have been in the past. Activity-based costing for external departments can be priced and charged accordingly. If the organization knows the minimum amount that it will take to accurately research and develop new products then the administration will be able to upcharge for some the services securing the company additional profits, which is the main goal of every organization, excluding non-profit organizations.

Table 1

Ideal Manufacturing Company | | | | | | Activity Cost Pools | Annual Cost | Total Estimated Drivers | | | Market Analysis | 1,050,000 | 15,000 Hours | | | Product Design | 2,350,000 | 2,500 Designs | | | Product Development | 3,600,000 | 90 Products | | | Prototype Testing | 1,400,000 | 500 Tests | | |
Note. From “Kimmel, Weygandt, & Kieso, 2011 p. 935” Table 2 | | | | Activity-Based Overhead Rate | | | | | | Market Analysis | | Product Design | | | | | | 1,050,000 | = 70 Hours | 2,350,000 | = 940 Designs | 15,000 | | 2,500 | | | | | | Product Development | | Prototype Testing | | | | | | 3,600,000 | = 40,000 Products | 1,400,000 | = 2,800 Test | 90 | | 500 | |

Table 3 | | | | | Activity -Based Overhead: Internal Department | | | | | | Activity Cost Pools | Cost Drivers | Activity-Based Costing | | | | | | | Market Analysis | 1800 | 1800*70 | = 126,000 | | | | | | | Designs | 280 | 280*940 | =263,200 | | | | | | | Products | 10 | 10*40,000 | = 400,000 | | | | | | | Engineering Test | 92 | 92*2,800 | =257,600 | | | | | | | | | Total | 1,046,800 | |

Table 4 | | | | | Activity -Based Overhead: External Department | | | | | | Activity Cost Pools | Cost Drivers | Activity-Based Costing | | | | | | | Market Analysis | 800 | 800*70 | = 56,000 | | | | | | | Designs | 178 | 178*940 | =167,320 | | | | | | | Products | 3 | 3*40,000 | = 120,000 | | | | | | | Engineering Test | 70 | 70*2,800 | =196,000 | | | | | | | | | Total | 539,320 | |

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