This is all that the question had and ask at the bottom Solar Power Systems SPS

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This is all that the question had and ask at the bottom

Solar Power Systems SPS manufactures a variety of equipment for solar power. At the start of 2012, the company estimated it would incur $10,000,000 of direct labor cost, $30,000,000 of direct material cost, and $40 manufacturing overhead ($5,000,000 of which is variable; 535,000,000 fixed.) Overhead is applied to jobs based on direct labor hours at a rate of $100 per direct labor hour At SPS, highly skalled employees are paid $50 per hour. Unskilled employees.get $15 per hour. In general the jobs that require highly skilled employees are more complex and require more support costs such as costs related to setting up equipment for production. The weighted average direct labor rate is $20 per hour During 2012, sales were unexpectedly low due to increased competition from a Swiss firm that entered t market with aggressive pricing. In particular, SPS didn't seem to be price competitive on jobs that called for mostly less skilled work Mit Romney, plant manager, talked to Phil Ryan, VP of Finance: "What's going on here? We're competitive on high end jobs that require a lot of support in term s of engineering, material handling, and setting up equipment but we can't compete on relatively simple jobs where, in my opinion, we're really efficient The VP asked his assistant to analyze costs related to recent bids for simple and complex" jobs. The result Job 358 (Simple) Direct Material Direct Labor 210 hours x $20 $40,000 4,200 Overhead 21.000 210 hours x $100 Total S65.200

Explanation / Answer

Overhead are potentially distorted s single overhead absorption rate is used for all type of job. For Example, Complext job requires to absorb more of manufacturing overhead as lot of support in terms of engineering, material handling and machine set up is required where as simple job may not required to absorb that much of mnaufacturing overhead.

SPS should lower prices to meet the competition from the Swiss firm but at the same time adopt Activity based costing system to absorb the manufacturing overhead. Activity based costing uses systematic and pregmatic approach of allocating the manfuacturing overhead to job based on overhead activity consumed by each job. This will make SPS more competitive in the market.

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