4. While it may have been a good idea to acquire the new equipment be-
cause of its greater capabilities, the calculations of the cost savings were
in error. The original calculations implicitly assumed that overhead
would decrease because of the reduction in direct labor-hours. In real-
ity, the overhead increased because of the additional costs of the new
equipment. A differential cost analysis would reveal that the automated
equipment would increase total cost by about $316,000 a year if the la-
bor reduction is only 2,000 hours.
Cost consequences of leasing the automated equipment:
Increase in manufacturing overhead cost:
Lease cost of the new machine ... $348,000
Cost of new technician/programmer ... 50,000
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