756 Words Sep 24th, 2015 4 Pages
Managerial Perspective

La Rue Fuentes


October 5, 2015

Activity Based Costing Analysis for Ideal Manufacturing

The purpose of this exercise is to describe the use of activity based costing and its benefits. The comparison of activity based costing with conventional method has been done by using the R&D cost of Ideal Manufacturing has been used. The benefit of using the activity based costing has also been described.

Activity Based Costing

The cost of a product comprises of direct material, direct labor and overheads. It is easy to trace direct material and direct labor to a particular product. But it is not easy to trace directly all overheads to a particular
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Now the each activity rate is used to determine the R&D cost being charged to in house department and it is as follows:

|Market analysis | $ 126,000 |
|Product design | $ 263,200 |
|Product development | $ 400,000 |
|Prototype testing | $ 257,600 |
|Total cost charged in house | $ 1,046,800 |

It is quite clear that the traditional method based on hours is showing R&D cost of $1008000, which is short by 1046800-1008000 = $38800. It means that the cost for the activity used in house was more than it is charged using traditional method.

Under activity based costing, the R&D cost to outsider is as follows:

|Market analysis | $ 56,000 |

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