Costs Should Not Have A Negative Financial Impact On Borealis Manufacturing

Define “manufacturing overhead,” and: Cite three examples of typical costs that would be included in manufacturing overhead. Explain why companies develop predetermined overhead rates.

Manufacturing overhead are all indirect costs incurred during manufacturing that do not include direct labor and machine costs. Manufacturing overhead is allocated to every unit produced for the purpose of reporting inventory and cost of goods sold.

Different types of costs are classified as manufacturing overhead including:

1. Indirect labor costs – These include costs incurred in retaining personnel who are not directly involved in the production of the final product or service even though their input is significant in the manufacturing process. Some of the

Firstly, predetermined overhead rates help a manufacturing company to assign overhead costs as goods are produced thereby facilitating the timeliness of information. Secondly, predetermined overhead rates enable companies to adjust actual overhead variations that are not due to activity fluctuations. For instance, electricity costs might be higher in summer mainly because air conditioning run for longer periods. If overhead rates were not predetermined, the increased electricity costs would increase the production costs per unit to in summer compared to other seasons. Another reason that companies develop predetermined overhead rates is to address variations in activity levels that do not affect the fixed overhead costs. This is because any change in activity levels would affect the fixed overhead costs per unit produced.

Explain why the increase in the overhead rate should not have a negative financial impact on Borealis Manufacturing.

For Borealis Manufacturing, the increase in the overhead rate should not negatively impact the finances of the company as the reduction in direct labor cost offsets the increase in the overhead cost by the same amount. This implies that the increase in manufacturing overhead does not have a negative financial impact on the manufacturer. However, if the increase in the overhead rate was not accompanied by a subsequent decrease in the direct costs, the overhead rate might have

However, this is not the best method for calculating actual costs as it is inaccurate and is best used when the overhead costs are relatively small. An alternative and more recent costing system is the activity-based costing (ABC) system that assumes that manufacturing overhead is caused by activities rather than volume. Borealis Manufacturing could benefit from the ABC system in that costs can be pooled according to activities. This could help the manufacturer to better plan its costs. The information obtained through the ABC system is more accurate and this could enable the manufacturer make better decisions regarding product mic and product pricing. For instance, if the new QC system increased the production costs, the manufacturer could use the information to pass the additional costs to the