The CEO of Walker Ltd. is currently investigating ways to modernize the company's manufacturing process. At the first staff meeting, the chief engineer presented a proposal for automating the assembly department, and recommended that the company purchase two robots that would be able to replace the eight direct labour employees in the department. The cost savings outlined in the chief engineer's proposal include the elimination of the direct labour cost in the assembly department and a reduction of the manufacturing overhead cost in the department to zero, since the company charges manufacturing overhead on the basis of direct labour dollars using a plant-wide rate. The CEO of Walker Ltd. is puzzled by the chief engineer's explanation: "This just doesn't make any sense. How can a department's overhead rate drop to zero by adding expensive, high- tech manufacturing equipment? If anything, it seems like the rate ought to go up."
The chief engineer responds by saying, "I'm an engineer, not an accountant. But if we're charging overhead on the basis of direct labour, and we eliminate the labour, then we eliminate the overhead."
The CFO explains that as firms become more automated, they should rethink their product costing systems. The CEO asks the CFO to look into the matter and prepare a report for the next staff meeting. The CFO gathers the following data on the manufacturing overhead rates experienced by Walker Ltd. over the last five years. The CFO also estimates the following annual averages for each manufacturing department over the past several years:

Instructions
(a) Evaluate Walker Ltd.'s current product costing system of charging manufacturing overhead on the basis of direct labour dollars using a plant-wide rate.
(b) Comment on the chief engineer's statement that the manufacturing overhead cost in the assembly department would be reduced to zero if the automation proposal were implemented.
(c) How might Walker Ltd. find the ABC information useful in applying manufacturing overhead and revising its product-costing system to accommodate automation in the assembly department?

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Historical Plant-Wide Data Average Manufacturing Overhead Application Rate Year 2012 2013 2014 2015 2016 Average Annual Direct Labour Cost $ 500,000 600,000 1,000,000 1,500,000 2,000,000 Average Annual Manufacturing Overhead Cost 1,000,000 3,000,000 7,000,000 12,000,000 20,000,000 200% 50096 70096 800% 1,000% Moulding Department Annual Averages during a Recent Year Component Department Assembly Department $ 125,000 2,000,000 Direct labour costs Manufacturing overhead costs 1,00000 875,000125,000 11,000,000 7,000,000