Kamloops Manufacturing Sdn Bhd 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 as direct labor to the operation or job. In an effort to improve efficiency and quality, a computerised video QC system was purchased for RM250,000. The system consists of a mini-computer, 15 vedio cameras, other peripheral hardware, and software. The new system uses cameras stationed by QC engineers at key points in the production process. Each times 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 plantwide 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 ………… RM1,900,000 RM2,100,000
Budgeted direct-labor cost …………………. 1,000,000 700,000
Budgeted overhead rate ……………………. 190% 300%

“300%! How can we compete with such a high overhead rate?” lamented the president.
Required:

1. a. Define “manufacturing overhead” and cite three examples of typical costs that
Would be included in manufacturing overhead.

b. Explain why companies develop predetermined overhead rates.

2. Explain why the increase in the overhead rate should not have a negative financial impact on Kamloops Manufacturing Sdn Bhd.

3. Explain how Kamloops Manufacturing could change its overhead application system to eliminate confusion over product costs.

4. Discuss how an activity-based costing system might benefit Kamloops Manufacturing Sdn Bhd.

Help me please... :confused:

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I did anwer this question.. but only up to until question 2. and I need help for the question after that.. by the way, this is my actual answer.. and I'm not sure it's correct or wrong..

1) a) Manufacturing overhead consists of all manufacturing costs other than direct labour, direct materials and direct expenses. It therefore includes all indirect manufacturing labour and managerial costs plus indirect manufacturing expenses. It also refers to indirect factory-related costs that are incurred when a product is manufactured. The three examples are the salaries of the QC engineers, the production supervisors and the computerised video QC system.

b) It is used to apply overhead to jobs. If actual manufacturing overhead cost is applied to jobs, then the company must wait until the end of the accounting period to apply overhead and to cost jobs. If the company computes the actual overhead rates more frequently to get around this problem, the rates may fluctuate widely. Overhead cost tends to be incurred somewhat evenly from month to month (due to the presence of fixed costs), whereas production activity often fluctuates. The result would be high overhead rates in periods with low activity and low overhead rates in periods with high activity. For these reasons, most companies use predetermined overhead rates to apply overhead cost to jobs.

2) When automated equipment (a computerised video QA system) replaces direct labor (QC inspectors), overhead increases and direct labor decreases. This results in an increase in the predetermined overhead rate – particularly if it is based on direct labor.