Increased Company ProfitsFabricator Inc, a company specializing in equipment manufacturing, uses an order costing system. The overhead rate is now $3,000 per direct labor hour. The design engineer does not understand how the accounting department arrives at this rate. He believes this increases the cost of goods sold and encourages design engineers to use machine technology rather than direct labor. He says there has been less and less direct labor in recent years, but overhead costs continue to rise. He also worries about possible errors in their estimate of assembly time. A thirty-minute mistake can cost $1,500. He fears that high overhead costs will rob the company of its competitive advantage. If the engineer could review the manufacturing cost and order cost system with the accounting department, that would likely address his concerns. Manufacturing cost is determined by management accountants, who can provide useful cost information to manufacturing companies. Manufacturing cost is determined by direct material cost, direct labor cost, and factory overhead. Direct material cost shows how much it costs to convert raw materials into a finished product. To be considered a direct material cost, it must represent a significant portion of the finished product and a large portion of the total cost of the item. Direct labor cost is the cost of employee wages during the period of converting raw materials into finished product. To be considered a direct labor cost, it must also represent a significant portion of the finished product and a large portion of the total cost of the item. Factory overhead is then 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. Whereas traditional manufacturing tolerates defects and treats suppliers and customers as independent entities. Activity-based costing will allow factory overhead costs to be more accurately allocated. This would use the cost of the activity to determine the cost of the product. This is more cost effective than using a single factory-wide overhead rate (Warren p 399). After the engineer goes to the accounting department and explains why the overhead costs are increasing due to factors such as utilities, employee salaries, material cost. increase, etc… He might then suggest lean manufacturing and activity-based pricing as a way to save the company money and attract more business. As we all know, businesses aim to maximize profits..