Benefits of activity-based costing (adapted from the CMA exam). Halloway Manufacturing has j ust completed a major change in the method it uses to inspect its products.

Previously twelve 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 Halloway 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 Halloway to replace the 12 quality control inspectors with just two quality control engineers.

The president of the company is confused. She was told that the production process was now more efficient, yet she notices 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 Halloway Manufacturing and clear up the president's confusion?

Transcribed Image Text:

Before After Budgeted Overhead $2,000,000 $2,500,000 Budgeted Direct Labor 1.200,000 1,000,000 Budgeted Overhead Rate 167% 250%