Enviro, Inc. has just completed a major change in the method it uses to inspect its products. Previously 12 inspectors examined the product after each major process. The salaries of these inspectors were charged as direct labor to the operation or job. In an effort to improve efficiency, the Enviro production manager recently bought a computerized quality control system consisting of a microcomputer, 30 video cameras, peripheral hardware, and software. The cameras are placed at key points in the production process, taking pictures of the product and comparing these pictures with a known €˜€˜good€™€™ image supplied by a quality control engineer. This new system allowed Enviro to replace the 12 quality control inspectors with just two quality control engineers. The president of the company was confused. She was told that the production process was now more efficient, yet she noticed a large increase in the factory overhead rate. The computation of the rate before and after automation is as follows:

How might an activity-based costing system benefit Enviro, Inc. and clear up the president€™sconfusion?

Transcribed Image Text:

Before $2,000,000 1,200,000 After Budgeted Overhead Budgeted Direct Labor Budgeted Overhead Rate $2,400,000 800,000 167% 300%