Managerial Accounting

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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:

Budgeted Manufacturing Overhead1,900,0002,100,000
Budgeted Direct Labor Cost1,000,000700,000
Budgeted Overhead Rate190%300%

“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.

By the due date assigned, deliver your assignment to the Submissions Area

Tutor Answer

School: University of Virginia

The assignment is complete.


Borealis Manufacturing
Student’s Name
University Name
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Manufacturing Overhead
Manufacturing overhead is the cost that cannot be tracked down to particular units of
production. The typical values are such as indirect labor and indirect materials, rent and utility
(Lewis, R. J. 1995). The materials that are used in the support process are the indirect materials
and include repairing tools and cleaning supplies. On the other hand, indirect labor entails
payment of wages to employees for example maintenance workers involved in the manufacturing
process. Thus, the per-unit cost cannot be placed by the company on these expenses, and hence,
they are placed under total manufacturing overhead costs. Overhead costs are however used to
calculate cost figure named as conversion cost. Conversion Costs contains both direct labor and
manufacturing overhead price. The primary role of the figure is to inform the management of
how much it cost to convert raw materials into a product that the customers would want to
Reasons for Companies Developing Predetermined Overhead Rates
Developing a predetermined overhead rate for a company assists in providing a tool that
is used to monitor the expenses volumes of vending and production. A well-described standard
provides a swift indicator that assists the company to know when it is time to review spending,
therefore, aid in prot...

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