Chadwick Industries has several manufacturing facilities that make a wide variety of industrial and consumer products. Two of the plants, River North and River South, make components for road construction equipment. The River North plant was built when the demand for the products exceeded the River South plant’s capacity. Even though slightly different in age at this point, the production process in both plants is roughly the same. Last year, however, the River North plant manager determined that the plant could use lower-cost utility labor in place of the skilled direct labor to bring raw materials to the assembly line and move finished products to the warehouse. While the total time required remained the same, the new materials handling process was included in overhead rather than being considered as direct labor. Staffing at the River North plant was adjusted to reflect the change. 

In looking over the production plans for next year, the Chadwick vice president of operations is surprised by the cost estimates for the two plants. Specifically, the manufacturing overhead rate, which had been comparable between the two plants, is now much higher at the River North plant. The vice president suggests moving some of the production to the River South plant, which has the capacity, to reduce production costs. 

Required

Prepare a report that states how an activity-based costing system might benefit Chadwick Industries and address the vice president’s concern about costs.