Ideal Manufacturing Company of Sycamore, Illinois, has supported a research and development (R&D) department that has for many years been the sole contributor to the companys new farm machinery products. The R&D activity is an overhead cost center that provides 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 outside, 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 or operating the R&D department has been spiraling uncontrollably, Ideals management is considering entertaining these outside approaches to absorb the increasing costs. But, (1) management doesnt have any cost basis for charging R&D services to outsiders, and (2) it needs to gain control of R&D costs. Management decides to implement an activity-based costing system in order to determine the charges for both outsiders and the in-house users of the departments 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: Activities Cost Drivers Total Estimated Cost Driver Activity 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

Instructions: (a) Compute the activity-based overhead rate (pool 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 280 designs relating to 10 products, and requested 92 engineering tests? (c) How much cost would serve as a 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 3 products, and resulting in 70 engineering tests? (d) What is the benefit to Ideal Manufacturing of applying activity-based costing to its R&D activity for both in-house and outside charging purposes?