Overhead costs To begin with, it is important to know what over head rates or costs are. An overhead rate is usually a component of net multiplier. These are costs that are not chargeable to projects, like rent, insurance or utilities. It indicates the relationship between the indirect expenses to the direct expenses. Ronsin should be accurate in her computation of the overhead rates so that the company can know how the company can allocate direct expenses, like labour expenses when required. It is correct that Ronsin divided the total manufacturing overhead by total direct labour hours estimates as per the production manager’s estimates.
The overhead rate so far calculated will be used for job costing in the coming year. It must be understood that labour costs are either direct or indirect. Therefore, the suggestion to cut the labour hours should cater for both elements. It will be futile if direct labour costs are reduced yet indirect labour costs keeps increasing. To increase labour hours means increasing the productivity rate of the company. In case overhead rate is inversely proportional to direct labour hours, it means that an increase in the direct labour hours will result in the reduction of the overhead rate (Arora, 2009). The decision to reduce the estimated direct labour hours by 5 % implies that the company will result in the rise of the overhead rate.
When the rate of overhead is higher it means that the company had more expenses in that previous year, and that the company had purchased more materials in order to produce more products. Increase in the level of production will result in the increase in income of the firm.
When all expenses are netted from the total operating income to pay for the direct and indirect labour expenses, it will still leave high level of net operating income (Arora, 2009). Shaving off 5% of 440000 labour hours imply that we have 440000-22000=418000 418000 labour hours will remain. Reduction in labour hours means that the company will save on direct labour expenses. This will thus increase the reserves of income that will be used for other activities of the firm. 2) The general manager in a way is trying to cut off the costs that go to labour in a way that seems to be unethical to the company.
It seems that his intention had not been known by the production manager, therefore, making the whole arrangement to appear obscured. However, much as the plan will result in the increase in net operating income, the whole idea should have been communicated to the production manager before any adjustment made in the job-ordering system in the computer. It may form part of what the general manager calls the Christmas bonus; all these arrangements should be made in tandem with the labour costing rules of the organization.
The system might have hold for some time in the past but it does not imply that the whole process is ethical. Considerations should be made on the effects of the laid off workers because it implies that cutting of labour hours means that the workers will be laid off at the expense of the increasing incomes of the company. Therefore, Ronsin should not accept the request from the general manager to reduce the direct labours so as to increase the net income of the company as it is unethical thing to do (Arora, 2009). Works cited Arora, Mohammed.
Costing Management. New York, NY: Penguin. 2009, Print