Worth Hawes Manufacturing has just completed a major change in its quality contr

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 with the picture of a

Explanation / Answer

a) Factory overhead rates are calculated based on estimated cost for indirect manufacturing overhead and estimated activity level which drives the overhead spending. It can be formulaized as overhead rate= Estimated manufacturing overhead / Activity units

These rates are useful to calculate the product cost for any product.

Accuracy of overhead rate depend on selection of right allocation basis. Activity based costing is a tool used in calculating the overhead rate to bring accuracy in overhead rates.

b) It will not have a negative impact becuase it's a increase in percentage terms because labor cost base has reduced but in absolute terms it will not have any negative impact.

c) Company can fix the overhead amount per unit. This amount will be calculated based on activity based and will be converted to unit level by lutiplying the rate obtained with unit level activity consumption.

d) Acitivity based costing system break down the cost into various pools and these cost are asigned to products based on cost driver applicable to that pool therefore it enable more accurate cost allocation and enable better and correct cost calculation for the various products.

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