ACC 561 WEEK 4

ACC 561 WEEK 4

ACC 561 Week 4,

Bilici and Dalci (2008) state “the basic premise of ABC is products consume activities, activities consume resources and resources consume costs” (p. 63). The cost of a product comprises of direct labor, direct material, and overheads. Direct material and direct labor can be traced more easily to a particular product, but this is not the case for overheads, which is not easy to trace to a particular product when determining its product cost. Activity-based costing helps in allocating cost to the product according to the resources used by each activity (See Appendix A).

The In-House Manufacturing Department

The annual costs for R&D activities are broken up as follows:

Market analysis $1,050,000
Product design $2,350,000
Product development $3,600,000
Prototype testing $1,400,000

R&D spends a total of $8,400,000.

The cost drivers and their usage for the related activities:

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

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When determining activities cost to the in-house manufacturing department, the cost per driver unit must be calculated (See Appendix B). The in-house manufacturing department that consumed 1,800 hours of market analysis time was provided 280 designs relating to 10 products and requested 92 engineering tests. The number of activities is multiplied by the cost per unit to obtain the dollar amount value cost per activity (See Appendix B). The in-house manufacturing department should be charged $1,046,800 or 12.46% of the total annual R& D related costs.

Pricing an R&D Bid

In order to find how much cost would serve as the basis for pricing an R&D bid, it is necessary to perform the following breakdown:

R&D cost activities are broken up as follows:

Market analysis $1,050,000
Product design $2,350,000
Product development $3,600,000
Prototype testing $1,400,000
Total Cost $8,400.00

The cost drivers and usage for activities will aid in calculating the cost per driver unit and determining activities costs to the in-house manufacturing department, as well as the future outsider. To accurately obtain the dollar amount value cost per activity, the numbers of activities are multiplied by the cost per unit.

Activity Cost Pools Cost Drivers Expected use of Cost Drivers per Activity Expected use of Cost Drivers per Product/ In-house Expected use of Cost Drivers per Product/The Outsiders
Market Analysis Hours of Analysis 15,000 Hours 1,800 13,200
Product Design Number of Designs 2,500 Designs 280 2,220

ACC 561 WEEK 4