Reference no: EM132556435
Sam Company 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 compensation of company's eight QC inspectors were charged as direct labour to the operation or job. In an effort to improve efficiency and quality, a computerized video QC system will be purchased in 2021 for $500,000.
The machining staff will be offered voluntary redundancy. The company's President is confused. His Director of Operation has told him how efficient the new system is, yet there is a large increase in the manufacturing overhead rate. The information for automation in 2021 is shown below:
2021
Budgeted manufacturing overhead $1,500,000
Budgeted direct labour cost $5,000,000
Budgeted machine hours 6,000 hours
"Budgeted manufacturing overhead cost for 2021 increased significantly," lamented the President, "how can we compete with such a high manufacturing overhead rate?"
Question (i) Explain why companies develop manufacturing overhead rates.
Question (ii) Explain why the increase in the manufacturing overhead cost should not have a negative financial impact on Sam Company.
Question (iii) Explain what other factors Sam Company should take into account before deciding whether or not to purchase the computerized video QC system.
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