Question

Worth Hawes Manufacturing has just completed a major change in its quality control (QC) process. Previously, QC inspectors had reviewed products 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, Worth Hawes purchased a computer video QC system for $250,000. The system consists of a minicomputer, 15 video cameras, 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 a new operation begins, the cameras are moved, and a QC engineer loads a new master picture into the computer. The camera takes pictures of the unit 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 immediately 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 overhead in calculating the company’s plantwide factory overhead rate, which is based on direct labor dollars.
In short, the company’s president is confused. The vice president of production has been commenting on how efficient the new system is, yet the president has observed that there is a significant increase in the factory overhead rate. The computation of the rate before and after implementation of the new QC system is as follows:


“Three hundred percent,” lamented the president. “How can we compete with such a high factory overhead rate?”

Required
A. Discuss the development of factory overhead rates. Why do we need factory overhead rates, and how are they computed? Discuss the accuracy of the computation of a factory overhead rate.
B. Explain why the increase in the overhead rate should not have a negative impact on Worth Hawes Manufacturing.
C. Explain, in the greatest detail possible, how the company could change its overhead accounting system to eliminate confusion over product costs.
D. Discuss how an activity-based costing system might benefit Worth HawesManufacturing.


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  • CreatedMarch 11, 2015
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