Manufacturing overhead - Borealis Manufacturing
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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 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 rat
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.
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Solution Summary
The response addresses the query posted in 700 words with APA References.
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The response addresses the query posted in 700 words with APA References.
// While producing or manufacturing a product in factory a business organization needs to bear a number of different costs and overheads, which altogether forms the overall cost of production. In this regard, the presented section of the paper leads to elaborate manufacturing overheads implied in the process of production//
Manufacturing Overhead
Other then direct labor and direct material, all the costs required for the purpose of manufacturing a product with factory comes under the category of manufacturing overheads. These overheads are usually known as factory burdens. The values of such types of overheads are calculated within the total cost of goods produced (Heisinger, 2009).
Examples of typical costs that would be included in manufacturing overhead:
In the manufacturing overheads costs such as Costs of electricity consumed by factory equipments, depreciation over building and equipments of production, and factory personnel (which do not include direct labors).
Rationale behind the development of predetermined overhead rates:
The determination of overrates in advance helps company to have effective ...
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