Borealis Manufacturing has
just completed a major change in its quality control (QC) process. Previously,
products had been reviewed by QC inspectors at the end of each major process,
and the company’s 10 QC inspectors were charged to the operation or job as
direct labor. In an effort to improve efficiency and quality, a computerized
video QC system was purchased for $250,000. The system consists of a
minicomputer, fifteen video cameras, and other peripheral hardware and
software. The new system uses cameras stationed by QC engineers at key points
in the production process. Each time an operation changes or there is a new
operation, the cameras are moved, and a new master picture is loaded into the
computer by a QC engineer. The camera takes pictures of the units in process,
and the computer compares them to the picture of a “good” unit. Any differences
are sent to a QC engineer, who removes the bad units and discusses the flaws
with the production supervisors. The new system has replaced the 10 QC inspectors
with two QC engineers.
The operating costs of the new
QC system, including the salaries of the QC engineers, have been included as
factory overhead in calculating the company’s plant-wide manufacturing-overhead
rate, which is based on direct-labor dollars. The company’s president is
confused. His vice president of production has told him how efficient the new
system is. Yet there is a large increase in the overhead rate. The computation
of the rate before and after automation is as follows:
|
Before |
After |
|
|
Budgeted Manufacturing |
1,900,000 |
2,100,000 |
|
Budgeted Direct Labor |
1,000,000 |
700,000 |
|
Budgeted Overhead Rate |
190% |
300% |
“Three hundred percent,”
lamented the president. “How can we compete with such a high overhead rate?”
Using the module readings and
the University online library resources, research manufacturing overhead.
Review the situation. Complete
the following:
·
Define “manufacturing
overhead,” and:
o
Cite three examples of typical
costs that would be included in manufacturing overhead.
o
Explain why companies develop
predetermined overhead rates.
·
Explain why the increase in
the overhead rate should not have a negative financial impact on Borealis
Manufacturing.
·
Explain how Borealis
Manufacturing could change its overhead application system to eliminate
confusion over product costs.
·
Describe how an activity-based
costing system might benefit Borealis Manufacturing.
Write a 2-3-pages paper in
Word format. Apply APA standards to citation of sources.
