Assignment 2: Manufacturing Overhead

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:

“Three hundred percent,” lamented the president. “How can we compete with such a high overhead rate?”

Using the module readings and the Argosy University online library resources, 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. Use the following file naming convention:  LastnameFirstInitial_M2_A2.doc.