Quality boxes limited manufactures fine handcrafted, wooden jewellery boxes. The company uses a job costing system for its production costs, and manufacturing overhead is applied on the basis of direct labour costs to all jobs. It's predetermined manufacturing overhead rate is based on a cost formula that is estimated $390,000 of manufacturing overhead for an estimated activity level of $100,000 direct labor cost. During the month of July, the company processed three jobs: B50, C81, and G60, of which B50 was started in June.

   

In july, Job B50 was completed and sold with a 20 percent mark-up. Jobs C81 and G60 were still in process.

 Question 1.5 Recently you have been appointed as the Management Accountant of Quality boxes company. Based on July performance, Kelly Megan, chief engineer, presented a proposal for automating the labour jobs. She suggested getting four robots that could replace the forty direct labour workers in the company. The cost savings outlined in Megan's proposal included eliminating direct labor cost and reducing factory overhead cost to zero because the company currently charges factory overhead on the basis of direct labour costs using a plantwide rate (as requirement 1.1 above). The company's CEO, Sam Brown, is puzzled by Megan's explanation of cost savings. The CEO has asked you to look into the matter and prepare a report for the next staff meeting. Your report should cover the following three issues:

a. Describe the shortcomings of the company's current system for applying overhead.

b. Explain the misconceptions in Kelley Megan's argument that the manufacturing overhead cost would be reduced to zero if the automation proposal was implemented.

c. Suggest ways to improve the allocation of overhead costs. [Word limit: 500 words. Note the word count at the end of your answer.)

July 1 July 31 Inventories: $ 36,600 $ 41,200 Direct Materials ? Work-in-Process Finished Goods