Assignment 2: Manufacturing Overhead - Borealis Manufacturin

Assignment 2 Manufacturing Overheadborealis Manufacturing Has Just Co

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: Before After Budgeted Manufacturing Overhead 1,900,000 2,100,000 Budgeted Direct Labor Cost 1,000,000 1,000,000 Budgeted Overhead Rate 190% 210% “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: .

Paper For Above instruction

Manufacturing overhead is a crucial component of cost accounting that encompasses all indirect costs associated with manufacturing a product. These costs are necessary for the production process but cannot be directly traced to specific units of production. Understanding manufacturing overhead is essential for accurately determining product costs, setting prices, and controlling expenses. This paper discusses the definition of manufacturing overhead, provides examples of typical costs included in it, explains the rationale behind predetermined overhead rates, analyzes the implications of increased overhead rates, explores potential improvements in overhead allocation systems, and examines how activity-based costing could benefit Borealis Manufacturing.

Definition of Manufacturing Overhead

Manufacturing overhead, also known as factory overhead or indirect manufacturing costs, refers to all production costs other than direct materials and direct labor. These costs are incurred during the manufacturing process but are not directly assignable to specific units of finished goods. Manufacturing overhead includes expenses related to the factory environment, supervisory functions, equipment, and support services that enable production to occur efficiently.

Examples of Manufacturing Overhead Costs

Three typical examples of manufacturing overhead costs include:

1. Factory Indirect Materials: These are materials used in the production process that cannot be conveniently traced to specific units, such as lubricants, cleaning supplies, or small tools.
2. Factory Utilities: Utilities like electricity, water, and heating that are necessary to operate the manufacturing facilities fall under manufacturing overhead because they support the production environment but are not directly incorporated into the product.
3. Factory Equipment Depreciation: The depreciation expense on machinery and factory buildings reflects the consumption of long-term assets used in production but are not directly attributable to individual units of output.

Rationale for Developing Predetermined Overhead Rates

Companies develop predetermined overhead rates to allocate manufacturing overhead costs to products in a consistent and timely manner. These rates are established before the production period begins based on estimated overhead costs and estimated activity levels, such as direct labor hours or machine hours. Using predetermined rates allows companies to assign overhead costs to products during production, facilitating budgeting, cost control, and pricing decisions. It also helps smooth out fluctuations in overhead expenses due to seasonal or unexpected variations.

Impact of Increased Overhead Rate on Borealis Manufacturing

Although Borealis Manufacturing's overhead rate has increased significantly, this should not necessarily translate into negative financial consequences. The rise in the rate may be due to increased investment in automation and quality control systems, which, although raising overhead costs, can lead to higher efficiency, better product quality, and reduced direct labor costs. Overhead costs are allocated to products, but the ultimate profitability depends on whether revenues from the products exceed total costs, including overhead. Moreover, a high overhead rate may reflect a higher level of indirect costs that are necessary for maintaining quality standards and operational effectiveness, which can be viewed as strategic investments rather than purely arbitrary expenses.

Improving Overhead Allocation Systems at Borealis

To eliminate confusion over product costs, Borealis Manufacturing could transition from using a plant-wide overhead rate based solely on direct labor costs to a more refined approach. One effective solution is to implement an activity-based costing (ABC) system. ABC assigns overhead costs to products based on the actual activities and resources they consume, providing a more accurate picture of product costs and profitability. This approach distinguishes between different activities, such as machine setups, quality inspections, or material handling, and assigns costs based on actual usage, thereby eliminating distortions caused by allocating all overhead through a single plant-wide rate.

Benefits of Activity-Based Costing

Implementing activity-based costing offers several advantages for Borealis Manufacturing. Firstly, it enhances cost accuracy, enabling management to identify high-cost activities and target areas for efficiency improvements. Secondly, ABC provides better insights into product profitability, which supports strategic decision-making regarding product lines, pricing, and resource allocation. Thirdly, it can improve cost control by highlighting activities that are disproportionately expensive relative to their value, encouraging process improvements. Overall, ABC aligns overhead costs more closely with actual activities, leading to more precise product costing and better financial management.

Conclusion

In conclusion, manufacturing overhead encompasses all indirect manufacturing costs essential for production but difficult to trace directly to products. Companies develop predetermined overhead rates to facilitate timely and consistent allocation of these costs, despite fluctuations and complexities. While Borealis Manufacturing’s increase in the overhead rate might seem concerning initially, it reflects strategic investments in automation and quality control that can lead to operational benefits. Transitioning to activity-based costing can further refine product costing accuracy, improve managerial decision-making, and maximize profitability. Therefore, embracing more sophisticated costing methods will enable Borealis Manufacturing to remain competitive and financially robust in a dynamic manufacturing environment.

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