Borealis Manufacturing has just completed a major change in its quality control (QC) process....

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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 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.

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David · Accepted Answer

Question: Define manufacturing overhead. Cite three examples of typical costs that would be included in manufacturing overhead. Explain why companies develop predetermined overhead rates?
Answer:
Manufacturing overhead:
Overheads are the expenses which are not directly related to product or services. Some expenses like direct material, direct labor and direct expenses can be directly identified with the product for which they are incurred and are known as direct cost. These direct costs ear charged to related product easily. However, overheads cannot be directly identified with the related product, but still incurred on the production of goods or provision of service. Therefore, it is necessary to include the overhead cost in the computation of cost of goods produced. The overheads are allocated or apportioned to products for which they are incurred. 
Manufacturing overheads are the expenses which are indirect to product, but are factory (where the production occurs) related expenses and are incurred for the production of goods. Some of manufacturing overheads are as below:
(1) Factory administration overheads
(2) Indirect labor overhead (like electrician’s salary)
(3) Stores overhead (expenses incurred for handling of material in the factory)
(4) Indirect material (like grease, oil used for plants for production of goods)
Why predefined overhead rates?
As mentioned above, overhead are indirect costs and cannot be directly identified with products. Suppose ‘X Company’ manufactures three products namely A, B and C.  A common man is involved in handling of raw material used in all of three products. So the cost of salary of this man (handler) cannot be directly identified with A, B or C. But the salary related expenses need to be incorporated in the cost of A, B and C, in order to compute the correct cost of production. Therefore, these indirect costs or overheads are distributed or apportioned among the products manufactured, by using a predefined rate. In this case, the numbers of hour of handler can be the basis for apportioned of cost of salary among products A, B and C. Accordingly, per hour cost of handler can be the predefined rate and based on number of hours devoted to products handling, the cost of salary of handler can be distributed among product A, B and C.
Question: why the increase in the overhead rate should not have a negative financial impact on Borealis Manufacturing. 
Answer:
	 
	Before
	After
	Budgeted Manufacturing Overhead
	1,900,000 
	2,100,000 
	Budgeted Direct Labor Cost
	1,000,000 
	700,

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...

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