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Literature review of activity based costing
Literature review of activity based costing
Importance of job order costing systems
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Increasing Company Profits
Fabricator Inc, a specializes in equipment manufacture, and uses a job order costing system. The overhead rate is now $3000 per direct labor hour. The design engineer does not understand how the accounting department comes up with this rate. He thinks it drives up the cost of the products being sold, and encourages the design engineers to use machine technology instead of direct labor. He says the there has been less and less direct labor over the past few years, but overhead continues to rise. He is also concerned about when errors in their estimate of assembly time. A thirty minute mistake can cost $1,500. He is concerned that the high overhead cost will cost the company its competitive edge. If the engineer could reviewing the manufacturing cost and the job ordering cost system with the accounting department it would probably address his concerns.
The manufacturing cost is determined by managerial accountants, they can provide useful cost information for manufacturing businesses. The manufacturing cost is determined by direct materials cost, direct labor cost, and factory overhead cost. Direct materials cost shows how much it cost to convert raw materials to a finished product. To qualify as direct material cost it has to be an important part 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 time to convert raw materials to a finished product. To qualify as direct labor cost it must also be an important part of the finished product and a large portion of the total cost of the item. Then the factory overhead is the indirect cost of the item. This can include utilities, equipment maintenance, property taxes of the b...
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...ng. When I comes to scheduling, quality, suppliers, and customers lean manufacturing has zero defects and emphasizes supply chain management. Where as, traditional manufacturing tolerates defects, and treats suppliers and customers as independent entities. Activity based costing will assign factory overhead more accurately. This would use the cost of the activity to determine the product cost. This is more cost effective than using a single plant wide overhead rate (Warren p 399).
Once the engineer goes to the accounting department and they explain to him why the overhead is increasing due to things such as utilities, employee wages, cost of material increase, etc.… He could then suggest lean manufacturing and activity based costing as a way of saving the company money and attracting more business. As we all know companies are in the business of maximizing profits.