=+Tech Inc., a specialized tool manufacturer, uses a job order costing system. The overhead is allocated to jobs on the basis of direct labor hours. The overhead rate is now $1,500 per direct labor hour. The design engineer thinks that this is illogical. The design engineer has stated the following:

Our accounting system doesn’t make any sense to me. It tells me that every labor hour carries an additional burden of$1,500. This means that direct labor makes up only 5% ofour total product cost, yet it drives all our costs. In addition, these rates give my design engineers incentives to “design out” direct labor by using machine technology. Yet, over thepastyears as we have had less and less direct labor, the overhead rate keeps going up and up. I wont be surprised ifnext year the rate is $2,000 per direct labor hour. I’m also concerned because small errors in our estimates ofthe direct labor content can have a large impact on our estimated costs. Just a 30-minute error in our estimate ofassembly time is worth $750. Small mistakes in our direct labor time estimates really swing our bids around. I think this puts us at a disad¬

vantage when we are going after business.