Byp17-2 Managerial Analysis

February 27, 2015

In business there are tons of things that need to be accounted for in order to track where the money goes.   Due to reduction of manpower and the rise of automation in manufacturing, the hardest thing to determine has been the appropriate amount of overhead to allocate for each product.   Overhead that was once accounted for by manpower hours has changed over to machine hours, maintenance, utilities expenses, and facilities expenses.   One method of accounting for the overhead activities of a business is to identify the activities performed and assign a direct cost to each and every one in order to account for different aspects of business operations.   This method of accounting, known as activity based costing, breaks down the different activities in to activities cost pools and assigns a value to each activity.   The value or cost of each activity is then affected by cost drivers, or activities that utilize resources or create expenses in the manufacturing process.
As an example we’ll use Ideal Manufacturing Company, a manufacturing company that produces different product lines of farm equipment.   They have an in-house research and development department that has established a reputation for being highly successful in developing new products and testing them before production.   Successful or not, the cost of operating this department is beginning to get out of control but management has come up with an idea to recover some of the overhead costs of operating this department.   Because of their success in R&D, other agricultural manufacturing companies have ask Ideal to help in the development of special projects.  
Before Ideal can entertain the thought of offering their research and development services to outside companies, they must identify the costs involved in their R&D process and assign a value to each activity to ensure proper billing for their...