Manufacturing Overhead Borealis Manufacturing Has Just Compl

Manufacturing Overheadborealis Manufacturing Has Just Completed A Majo

Manufacturing overheadborealis Manufacturing Has Just Completed A Majo 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 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. Write a 3–4-pages paper in Word format. Apply APA standards to citation of sources.

Paper For Above instruction

Manufacturing overhead plays a crucial role in the costing processes within manufacturing companies, serving as a collection of indirect costs that are necessary for production but cannot be directly traced to specific units of output. In the context of Borealis Manufacturing’s recent transition to automated quality control, understanding manufacturing overhead, its allocation, and potential improvements in costing systems is vital for accurate product costing and competitive positioning.

Definition of Manufacturing Overhead

Manufacturing overhead, also known as factory overhead or indirect manufacturing costs, encompasses all those production costs that are not directly attributable to specific products or services. These costs support the manufacturing process as a whole and include expenses incurred to operate and maintain manufacturing facilities, machinery, and related resources. Overhead costs are indirect because they benefit multiple products and cannot be traced precisely to individual units, necessitating their allocation across products based on a consistent costing methodology (Horngren et al., 2013).

Examples of Typical Manufacturing Overhead Costs

Common examples of manufacturing overhead costs include: (1) Depreciation on factory facilities and equipment, which represents the wear and tear of manufacturing assets; (2) Factory utility costs, such as electricity, water, and heating necessary to operate machinery and the manufacturing environment; and (3) Factory supervisory salaries, which oversee production operations but are not directly involved in the physical creation of products. These costs are essential for sustaining production but are not traced directly to individual units, thus classified under manufacturing overhead (Garrison et al., 2018).

Purpose of Predetermined Overhead Rates

Companies develop predetermined overhead rates primarily to facilitate timely product costing during the manufacturing cycle. Since manufacturing costs are incurred continuously, and actual overhead costs can only be known after period-end, predetermined rates allow organizations to estimate overhead costs in advance based on expected activity levels, such as direct labor hours or machine hours. This approach enables consistent product pricing, budgeting, and cost control, and reduces the variance between actual and applied overhead (Drury, 2013). The fixed rate simplifies the process, especially in complex manufacturing environments, by providing a uniform basis for assigning overhead costs shortly after the commencement of production.

Impact of Increased Overhead Rate on Borealis Manufacturing’s Finances

Despite the apparent concern over the rising overhead rate from 190% to 300%, this increase should not inherently have a negative financial impact. The rate increase reflects a change in how overhead costs are allocated, largely due to the integration of the new automated QC system. Since the operating costs of the new system, including salaries of QC engineers, are now classified as manufacturing overhead, the total overhead expense increased. However, this improved system enhances quality and efficiency, potentially reducing costs in other areas, such as rework and scrap, thereby offsetting the higher overhead. Furthermore, the rise in the overhead rate signifies a shift towards more accurate and comprehensive cost allocation, enabling better pricing and profitability analysis (Kaplan & Anderson, 2004).

Strategies to Clarify Product Costs

Borealis Manufacturing could adopt several strategies to refine its overhead application system and eliminate confusion. Transitioning from a plant-wide overhead rate based solely on direct labor costs to a more nuanced approach—such as Activity-Based Costing (ABC)—would distribute overhead more accurately based on activities that consume resources. Additionally, establishing multiple overhead rates for different departments or processes can prevent distortions caused by lump-sum allocation across the entire plant. Clear documentation, regular review of cost drivers, and training for managers on cost systems further enhance understanding of how overhead affects product costs (Cooper & Kaplan, 1988).

Benefits of Activity-Based Costing for Borealis Manufacturing

Implementing an activity-based costing system could offer significant advantages for Borealis Manufacturing. ABC allocates overhead based on actual activities that drive costs, such as machine setups or inspection hours, providing more precise cost information. This granularity enhances decision-making by identifying high-cost activities and opportunities for process improvements. For example, ABC could uncover that the automated QC system, although increasing overhead on paper, actually reduces inspection labor and rework costs, leading to more accurate product costing and pricing strategies. Moreover, ABC supports strategic initiatives like product line profitability analysis and process optimization, fostering competitive advantages in pricing and cost management (Kaplan & Anderson, 2004).

Conclusion

In conclusion, manufacturing overhead encompasses essential indirect costs supporting production activities. Companies develop predetermined overhead rates to manage cost allocation efficiently, especially when actual costs are uncertain at the time of production. Borealis Manufacturing’s increased overhead rate reflects a shift in cost structure due to automation, but it does not necessarily harm profitability if managed properly. Transitioning to more refined costing systems such as ABC can reduce confusion, improve cost accuracy, and support strategic decision-making. Ultimately, adopting advanced costing methods aligns with industry best practices, ensuring that product costs accurately reflect resource consumption and providing a competitive edge in manufacturing operations.

References

• Cooper, R., & Kaplan, R. S. (1988). Measure Costs Right: make the right decisions. Harvard Business Review, 66(5), 96-103.
• Drury, C. (2013). Management and Cost Accounting (9th ed.). Cengage Learning.
• Garrison, R. H., Noreen, E. W., & Brewer, P. C. (2018). Managerial Accounting (16th ed.). McGraw-Hill Education.
• Horngren, C. T., Datar, S. M., Rajan, M., & Ittner, C. (2013). Cost Accounting: A Managerial Emphasis (14th ed.). Pearson.
• Kaplan, R. S., & Anderson, S. R. (2004). Time-driven Activity-Based Costing. Harvard Business Review, 82(11), 131-138.
• Needles Jr., B. E., & Powers, M. (2017). Financial Accounting (12th ed.). Cengage Learning.
• Van Horne, J. C., & Wachowicz, J. M. (2005). Fundamentals of Financial Management (12th ed.). Pearson Education.
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• Congressional Research Service. (2020). Cost Accounting and Its Role in Manufacturing Industry. CRS Report R46863.