Increasing Company ProfitsFabricator Inc, specializes in equipment manufacturing and uses a job order costing system. The general rate is now $3000 per direct labor hour. The planner does not understand how the accounting department arrives at this rate. He believes this increases the cost of products sold and encourages designers to use machine technology instead of direct labor. He says there has been less and less direct labor in recent years, but overhead continues to rise. He is also concerned about errors in estimating assembly times. A thirty minute mistake can cost $1,500. He is concerned that high overhead costs could cost the company its competitive advantage. If the engineer could review the manufacturing costs and job cost system with the accounting department, it would probably resolve his concerns. The cost of production is determined by managerial accountants, who can provide useful cost information for manufacturing businesses. Manufacturing cost is determined by direct material cost, direct labor cost, and factory overhead costs. Direct materials cost shows how much it costs to convert raw materials into a finished product. To be considered a direct material cost, it must constitute a major portion of the finished product and a significant portion of the total cost of the item. Direct labor cost is the wage cost of employees during the time it takes to convert raw materials into a finished product. To be considered a direct labor cost, it must also represent a major portion of the finished product and a major portion of the total cost of the item. So factory overhead is the indirect cost of the item. This may include utilities, equipment maintenance, b...... middle of paper ......ng property taxes. When it comes to planning, quality, suppliers and customers, lean manufacturing has no flaws and emphasizes supply chain management. Traditional manufacturing, on the other hand, tolerates defects and treats suppliers and customers as independent entities. Activity-based costing will allocate factory overhead more accurately. This would use the cost of the activity to determine the cost of the product. This is more cost effective than using one blanket rate for the entire establishment (Warren p 399). Once the engineer goes to the accounting department and they explain to him why overheads are increasing due to things like utilities, employee wages, material costs rising, etc... He might then suggest lean manufacturing and activity-based costing as a way to save the company money and attract more business. As we all know, the goal of companies is to maximize profits.