Fabricator Inc.

Fabricator Inc.

Introduction

In today's world where global competition among companies forced service organizations and manufacturing businesses to be more flexible, automate and integrated to reduce costs. It is a fact that without accurate cost calculation technique, it is difficult to sustain.

Discussion

Various companies use traditional costing for assigning cost to their products. Traditional costing refers to allocation of cost to the products based on volume metric such as direct labor hours. It is noted that when manufacturing is becomes more complicated the cost of overhead increases and relatively direct labor hour decreases. In any business it is hard to calculate the exact cost of service or product. It is also important to have accurate cost for better and efficient management decisions. In addition to this accurate cost can be made only when cost is identifiable in directly in relation with service or product produced. It is noted that some costs can be easily identified that occurs in manufacturing of product or service such as direct labor and direct material can be easily related directly with service or product produced. There is a major issue with overhead of the business that is difficult to relate with product or services produced. In previous times, use of direct labor as the base for calculating activity was relevant, as in previous time direct labor is highly proportioned with total manufacturing cost of the product or service manufactured. That's it is widely accepted and adopted due to its high association with manufactured product and costing of the product with direct labor. That in result made direct labor a popular and important base for allocating overhead (Weygandt et. al, 2009). It is observed that Fabricator Inc. was using the same old method for computing the overhead. Although it is notable that direct labor constitutes only 5% of ...