Reference no: EM132549509
LeRoy Williams, vice president for manufacturing at Alpha Omega Electronics (AOE), is concerned about problems associated with the company's change in strategic mission. Two years ago, AOE's top management decided to shift the company from its traditional position as a low-cost producer of consumer electronic products to a product differentiation strategy. Since then, AOE has increased the variety of sizes, styles, and features within each of its product lines. To support this shift in strategic focus, AOE has invested heavily in factory automation. Top management also endorsed LeRoy's decision to adopt lean manufacturing techniques and Activity Based Costing, with the goal of dramatically reducing inventory levels of finished goods. AOE's cost accounting system has not been changed, however. Manufacturing overhead is still allocated based on direct labor hours, even though automation has drastically reduced the amount of direct labor used to manufacture a product. Consequently, investments in new equipment and machinery have resulted in dramatic increases in manufacturing overhead rates.Total estimated overhead cost $15,20,000 and estimated direct labor hours 800,000 DLHs.
The situation has created some serious problems like:
a. Generally, some products now cost more to produce usingstate-of the-art equipment than they did before the new equipment was purchased.Yet the new equipment has increased production capacity while simultaneouslyreducing defects.
b. Some competitors have begun to price their productsbelow what AOE's cost accounting system says it costs to produce that item.
c. LeRoy is frustrated byhis inability to quantify the effects of the quality improvements that have occurred.
d. Line managersin the factory, however, complain that they need more accurate and timely information on physical activities, such as units produced, defect rates, and production time.
e. LeRoy is frustrated because the move to lean manufacturing was successful in markedly reducing inventory levels this past year but significantly lowered profitability.
Requirements:
Question 1. Explain how to modify the cost accounting system to more accurately reflect AOE's new production processes? Calculate the predetermined overhead rate.
Question 2. How AOE Company can control those serious problems to assess the effectiveness and efficiency of production cycle activities?
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