Henry's total overhead has probably increased because it has acquired considerable automated equipment, so its depreciation will be higher. And since it has terminated quite a few of its employees, the divisor used to calculate the predetermined overhead rate will decrease if it continues to use direct labor hours as an allocation base, because fewer direct labor hours will be used. If Henry changes to machine hours as an allocation base, that will probably also be lower than the former direct labor hours, because machines can usually do the job more quickly than people can. The result of an increase in the numerator coupled with a decrease in the divisor will be an increase in the company's factory overhead rate per direct labor hour. Because Henry has cut its staff so much and replaced them with machines, it will be limited in its ability to make any further reductions in order to respond to economic downturns. The machines are a fixed cost that cannot be cut as easily as workers can be.
II, the use of direct labor hours seems to be appropriate is not true, because of the increase in automated equipment. Machine hours would be a better cost allocation base. III, Henry will lack the ability to properly determine labor variances, is also not true. Henry will be able to properly determine labor variances.
III, Henry will lack the ability to properly determine labor variances, is not true. Henry will be able to properly determine labor variances.
II, the use of direct labor hours seems to be appropriate, is not true, because of the increase in automated equipment. Machine hours would be a better cost allocation base.
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