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 Overhead |
1,900,000 |
2,100,000 |
|
Budgeted Direct Labor Cost |
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?”
Research manufacturing overhead.
Review the situation. Complete the following:
- Define “manufacturing overhead,” and:
- Cite three examples of typical costs that would be included in manufacturing overhead.
- 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 3–4-pages paper in Word format. Apply APA standards to citation of sources.