Premium Essay

Seligram, Inc.: Electronic Testing Operations

In:

Submitted By hphpya
Words 925
Pages 4
Part A With the existing cost system, there is only one cost driver which is direct labour. The total overhead in the existing cost system is a mix of direct costs and indirect costs. The numbers can be misleading because certain costs such as security, stores/warehousing and holidays/vacations are indirect costs to the cost object which cannot be traced back to specific products or activities. For example, under this cost system, the building depreciation would have to be measured based on direct labour hour. However, compnanies record depreciation expense under the methods allowed under IFRS or APSE such as straight-line method or double decline method. By doing so, the fixed costs and indirect costs which cannot be traced to direct labour hour increase the numerator which makes the burden rate greater than the one which only has direct costs in the numerator. With the accounting manager’s approach, the company’s able to use two cost drivers to separate machine cost and direct labour cost. By measuring manufacturing costs based on machine hour, ETO would be able to get a more accurate total burden cost. However, from exhibit 6, it is clear to see that the machine hours used in mechanical room is greater than the hours used in main room. By using one single machine-hour rate for both rooms, ETO will experience higher costs in main room than it is supposed to have which can also be misleading. Therefore, it is still not the best approach. Among the three cost systems, the consultant’s approach seems to be the most accurate one. By noticing the different machine hours used in two rooms, this system breaks down the total machine costs for each product into main room costs and mechanical room costs. By doing so, ETO will get two different machine-hour rates for two different rooms and apply those two burden rates, the machine cost for each different product will be

Similar Documents

Premium Essay

Seligram

...Seligram, Inc: Electronic Testing operations Executive Summary ACC 736 9/20/11 Introduction Electronic Testing Operations (ETO) is a division of Seligram Inc that provides centralized testing for electronic components such as integrated circuits. ETO operated as a cost center and transferred products to other divisions at full cost. Signs of obsolescence came from the dependence on vendor certification, a shift from simple inspection to broader based test technology and the expensive automated equipment for components. There were two accounting systems proposed to alleviate the problem and get a more accurate cost analysis. These accounting systems were used to further trace the allocated cost pools. Central Issue The accounting systems include two parts: direct labor and total burden. In the existing accounting system (Level 1), the total burden was calculated by multiplying the actual direct labor dollars by the 145% burden rate. The second accounting system (Level 2) , which was proposed by the accounting manager, traced the total burden into two cost pools: administrative and technical pool and test room pool. Then corporate management proposed the third accounting system (Level 3) to further divide the burden to three cost pools: administrative and technical pool, main test room pool and mechanical room pool. The first issue is which accounting system is the...

Words: 933 - Pages: 4

Premium Essay

Seligram

...Seligram, Inc: Electronic Testing Operations Questions 1. The reason for ETO’s failure lies within its single cost pool accounting system. This system treats all products similarly in terms of required direct labor and overhead. However, five products require different amounts of direct labor, while some needs automated operation. We also believe that trends of obsolescence of labor-based burden allocation process may have played a role in miscalculating the cost for ETO. 2. Exhibit 1 shows three different cost systems (current, manager and consultant proposal). Current system, assuming 145% burden rate without considering automated operation, yields total cost of $12,489. Manager’s proposal takes account of automated operation ($80.10 per hour) and different labor burden rate of 20.10%. This system yields total cost of $12,827. Consultant, using same labor burden rate of 20.10% while treating main and mechanical test room as different cost pools, results in total cost of $13,728. 3. Among these different costing systems, our team believes that consultant’s proposal is the most accurate. Treating main and mechanical room separately is the best measure to accurately trace costs back to real operation factors at ETO. 4. While we prefer consultant’s proposal, the proposal still does not distinguish administrative cost from labor cost. Since ETO tests many electronic component, the complexity and required specialized labor force would vary greatly. To be more accurate...

Words: 314 - Pages: 2

Premium Essay

Ma Case

...Managerial Accounting Case Study 2: Seligram, Inc: ETO 96122050 96122051 96122052 96122073 96122085 96122088 96122092 Group 1 At the beginning, the Electronic Testing Operations (ETO) measured two components of cost: direct labor and burden, but the burden is grouped into a single cost pool that includes all costs and divided by direct labor dollars to obtain the burden rate. (Q2) ETO’s manager picked up 5 components to evaluate the impact of different accounting system. The reported costs from existing system can be computed as follows, given the burden rate 145%: Product ICA ICB Capacitor Amplifier Diode Direct Labor 917 2,051 1,094 525 519 Burden 1,330 2,974 1,586 761 753 Total Costs 2,247 5,025 2,680 1,286 1,272 Based on the accounting manger’s proposal, the operation burden can be divided into machine-hour and direct labor burden. We use the revised burden rate 21% and machine-hour rate $80.1 to show the updated costs: Product ICA ICB Capacitor Amplifier Diode Direct Labor 917 2,051 1,094 525 519 Burden 193 431 230 110 109 Machine Hour 18.50 40.00 7.50 5.00 12.00 Machine Burden 1,482 3,204 601 401 961 Total Costs 2,591 5,686 1,924 1,036 1,589 If ETO follows the consultant’s recommend, treats the main test room and mechanical test room as different cost pools. The three-burden-pool system reports the cost: ($63.34 for main room burden rate and $112.63 for mechanical room) Product ICA ICB Capacitor Amplifier Diode Direct Labor 917 2,051 1,094 525 519 Burden 193...

Words: 916 - Pages: 4

Premium Essay

Seligram Case

...CASE WRITE UP ON SELIGRAM, INC.: ELECTRONIC TESTING OPERATIONS Computation of the costs of the five components in Exhibit 6 using the (a) Existing System, (b) First Modified System, (c) Second Modified System (a) The existing system: Total Cost = Direct Labor Cost + Burden = Direct Labor Cost + (Burden Rate x Direct Labor Cost) = Direct Labor Cost + (145% x Direct Labor Cost) Accordingly, using Exhibits 3 and 6, the costs will be as follows: Product | Direct Labor Cost ($) | Burden Rate x Direct Labor Cost (approx) ($) | Total Cost(approx) ($) | ICA | 917 | 1330 | 2247 | ICB | 2051 | 2974 | 5025 | Capacitor | 1094 | 1587 | 2681 | Amplifier | 525 | 761 | 1286 | Diode | 519 | 753 | 1272 | (b) The first modified system: Total cost = Direct Labor + Burden = Direct Labor + [Labor Burden + Machine Burden] = Direct Labor + [(Labor Burden Rate x Direct Labor Cost) + (Machine Hour Rate x Machine Hours)] = Direct Labor + [(21% x Direct Labor) + (8.10 x Machine Hours)] Accordingly, using Exhibits 5 and 6, the costs will be as follows: Product | Direct Labor Cost ($) | Labor Burden Rate x Direct Labor Cost (approx) ($) | Machine Hour | (Machine Hours x Machine Hour Rate)($) | Total Cost(approx) ($) | ICA | 917 | 193 | 18.5 | 1482 | 2591 | ICB | 2051 | 431 | 40.0 | 3204 | 5686 | Capacitor | 1094 | 230 | 7.5 | 601 | 1925 | Amplifier | 525 | 111 | 5.0 |...

Words: 586 - Pages: 3

Premium Essay

Prof

...TOPICS IN MANAGEMENT ACCOUNTING AMIS 4310 Topics/Case Descriptions Measuring Product Costs Case: Seligram, Inc.: Electronic Testing Operations Case Description: Explores the obsolescence of a cost system when technology changes. In particular, it asks students to increase the number of cost centers and allocation bases. The firm moves from a one-center, direct labor-hour system to a three-center, direct labor-hour and machine-hour systems. In addition, the case demonstrates how cost systems can induce subtle and not so subtle shifts in the strategy of the firm. In particular, we see how certain businesses are made to look inappropriately attractive or unattractive. Cost Behavior, Capacity Analysis and the Downward Demand Spiral Case: Bridgeton Industries: Automotive Component & Fabrication Plant Case Description: Bridgeton Industries was experiencing reduced sales. To become more competitive it introduced a classification procedure for products based upon their productivity and other factors. Products were classified into three groups: world class, potentially world class, and non-world class. The firm outsources the non-world class products. This outsourcing causes the costs on the remaining products to increase because some fixed costs associated with the outsourced products did not go away. These residual costs caused more products to become non-world class and hence candidates for outsourcing...

Words: 1304 - Pages: 6

Premium Essay

Topic of Management Accounting

...TOPICS IN MANAGEMENT ACCOUNTING AMIS 4310 Topics/Case Descriptions Measuring Product Costs Case: Seligram, Inc.: Electronic Testing Operations Case Description: Explores the obsolescence of a cost system when technology changes. In particular, it asks students to increase the number of cost centers and allocation bases. The firm moves from a one-center, direct labor-hour system to a three-center, direct labor-hour and machine-hour systems. In addition, the case demonstrates how cost systems can induce subtle and not so subtle shifts in the strategy of the firm. In particular, we see how certain businesses are made to look inappropriately attractive or unattractive. Cost Behavior, Capacity Analysis and the Downward Demand Spiral Case: Bridgeton Industries: Automotive Component & Fabrication Plant Case Description: Bridgeton Industries was experiencing reduced sales. To become more competitive it introduced a classification procedure for products based upon their productivity and other factors. Products were classified into three groups: world class, potentially world class, and non-world class. The firm outsources the non-world class products. This outsourcing causes the costs on the remaining products to increase because some fixed costs associated with the outsourced products did not go away. These residual costs caused more products to become non-world class and hence candidates for outsourcing...

Words: 1304 - Pages: 6

Premium Essay

Asdfasdf

...TOPICS IN MANAGEMENT ACCOUNTING AMIS 4310 Topics/Case Descriptions Measuring Product Costs Case: Seligram, Inc.: Electronic Testing Operations Case Description: Explores the obsolescence of a cost system when technology changes. In particular, it asks students to increase the number of cost centers and allocation bases. The firm moves from a one-center, direct labor-hour system to a three-center, direct labor-hour and machine-hour systems. In addition, the case demonstrates how cost systems can induce subtle and not so subtle shifts in the strategy of the firm. In particular, we see how certain businesses are made to look inappropriately attractive or unattractive. Cost Behavior, Capacity Analysis and the Downward Demand Spiral Case: Bridgeton Industries: Automotive Component & Fabrication Plant Case Description: Bridgeton Industries was experiencing reduced sales. To become more competitive it introduced a classification procedure for products based upon their productivity and other factors. Products were classified into three groups: world class, potentially world class, and non-world class. The firm outsources the non-world class products. This outsourcing causes the costs on the remaining products to increase because some fixed costs associated with the outsourced products did not go away. These residual costs caused more products to become non-world class and hence candidates for outsourcing...

Words: 1304 - Pages: 6

Premium Essay

Accounting Case

...Seligram, Inc.: Electronic Testing Operations 1. What caused the existing system at ETO to fail? 2. Calculate the reported cost of the five components listed in Exhibit 6 using: a. The existing system. b. The system proposed by the accounting manager. c. The system proposed by the consultant. 3. Which system is preferable? Why? 4. Would you recommend any changes to the system you prefer? Why? 5. Would you treat the new machine as a separate cost center or as a part of the main test room? Bridgeton Industries: Automotive Component & Fabrication Plant 1. The official overhead allocation rate used in the 1987 model year strategy study at the Automotive Component and Fabrication Plant (ACF) was 435% of direct labor cost. Calculate the overhead allocation rate using the 1987 model year budget. Why do you get different numbers? 2. Calculate the overhead allocation rate for each of the model years 1988 through 1990. Are the changes since 1987 in overhead allocation rates significant? Why have these changes occurred? 3. Consider two products in the same product line: Product 1 Product 2 Expected Selling Price $62 $54 Standard Material Cost 16 27 Standard Labor Cost 6 3 Calculate the expected gross margins as a percentage of selling price on each product based on the 1988 and 1990 model year budgets, assuming selling price remains constant and material/labor costs do not...

Words: 1915 - Pages: 8