5-27 Manufacturing support cost driver rates (Adapted from CMA December 1990) Mo

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5-27 Manufacturing support cost driver rates

(Adapted from CMA December 1990) Moss 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 as direct labor to the operation or job. In an effort to improve efficiency and quality, a computer video QC system was purchased 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 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 manufacturing support in calculating the company’s plantwide manufacturing support cost rate, which is based on direct labor dollars. Josephine Gugliemo, the company’s president, is confused. Her vice president of production has told her how efficient the new system is, yet there is a large increase in the manufacturing support cost driver rate. The computation of the rate before and after automation is shown here:

“Three hundred percent,” lamented the president. “How can we compete with such a high manufacturing support cost driver rate?”

a. Define manufacturing support costs and cite three examples of typical costs that would be included in this category. Explain why companies develop manufacturing support cost driver rates.

b. Explain why the increase in the cost driver rate should not have a negative financial impact on Moss Manufacturing.

c. Explain, in great detail, how Moss Manufacturing could change its accounting system to eliminate confusion over product costs.

d. Discuss how an activity-based costing system may benefit Moss Manufacturing.

Explanation / Answer

a) Manufacturing support costs are the other costs associated with manufacturing process. These are seperate from direct costs like direct labor or direct material. These costs are incurred in addition to these direct costs.

example of these costs is indirect labor, indirect material, depreciation on equipment

These costs are not directtly associated with manufacturing of units but are incurred in addition and as a supporting to main cost. Thses are unable to be appropriated to particular manufacturing process. Because of this reason these are established as cost drivers and absorbed on basis of some direct cost example direct labo

b) Over all cost in manufacturing is reduced by 1 Lakh as existing system had cost of 2.9 Million and new system will have a cost of 2.8 Million. So final impact will not be negative

c)

d) under absorption costing cost all costs are appropriated on one single cost driver, whereas in Activity based costing cost are divided on basis of activities involved. Expense are first identified and seperated on basis of different activities and then sereval cost drivers based on costs are ascertained. This process leads to better allocation of cost in comparison to absorption costing

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