Matshushita Corporation has a wide range of products ranging from computer chips to consumer electronics products under the brand name of Panasonic. It has a decentralized system where individual managers are responsible for each product division. In their product cost system, Matshushita uses one overhead cost pool that is allocated to products based on the direct labor hours. A recently hired accountant noticed the product diversity and manufacturing complexities and concluded that a labor rate based cost system would create severe under and over costing thereby distorting the product cost information. After several futile attempts to convince lower level management, he was encouraged to speak to the Chairman of the company. The Chairman patiently listened to the merits of activity based costing and the strategic advantages that will come with it for Matshushita. At the end of the presentation, he sighed; "Ah, you don't understand", he said gently, "our long term strategy is to create completely automated factory that is crucial for our success. I think our cost system is quite consistent with that strategy".

(Background: The Chairman of Matshushita is a very well educated person and knows all about different cost systems)

Required:

1.Examine the adequacy of the existing labor based overhead allocation system for creating a completely automated factory as the Chairman claims.

2.Why do you think the Chairman wishes to adopt this implementation strategy?Is there a downside to the implementation strategy?

If you are the accountant, how would you proceed with the conversation?