...Answer Key for Seligram, Inc. page 1 1. What business decisions at Seligram does the cost system support? In this context, what caused the existing cost system at Seligram (ETO) to fail? In general, a cost system supports the pricing decisions of the firm. ETO’s existing cost system contains only one cost center (the entire facility). All overhead is collected into a single cost pool, and the total overhead cost is divided by the total number of direct labor dollars consumed to give a single direct labor dollar burden rate. The major flaw in ETO’s existing system is that it assumes that all products consume direct labor and overhead in the same proportion. However, some products are produced on simple labor intensive equipment while others require very expensive automated equipment. Therefore, it is extremely unlikely that all products consume direct labor and overhead in the same proportion. As testing processes become more complicated, they require more expensive equipment and less labor-intensive equipment, which means that the proportion of costs due to overhead is increasing while the proportion of costs due to direct labor is decreasing. This caused the existing cost system to fail. 2. Calculate the reported costs of the five components described in Exhibit 6 under the three systems. 2a. Costs Under The Existing System: One Center System Product ICA ICB Capacitor Amplifier Diode Direct Labor $ 917 2051 1094 525 519 Overhead @ 145% 1330 2974 1586 761 753 Total 2247...
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...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...
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...1. What caused the existing system al ETO to fail? a. Several factors contributed to the ineffectiveness of the existing system. First, the labor-burden method for cost allocation became obsolete. Direct labor hours per lot tested was steadily declining and there was an increased reliance on vendor certification. This resulted in fewer overall test lots being delivered to ETO and larger quantities of smaller lots being received. Also, the “obsolescence of the labor-based allocation system was intensified by a shift from simple inspection services to broader based test technology.” (Seligram, Inc., 3) This resulted in a shift in the labor mix from direct to indirect personnel. Lastly, “the introduction of high-tech components created the need for more automatic testing, longer test cycles, and more data per part.” (Seligram, Inc., 3) This lead to a smaller base of direct labor to absorb the cost of depreciation on the new equipment. 2. Calculate the reported costs of the five components described in the case using: a. The existing system. – * Effective rate= Total OH $/ Total DL $ * Effective rate x DL$ each item uses= Allocated OH * Total Cost= Allocate OH + DL (we don’t have DM in this case, but we would add it if we did) a. 2246.65 b. 5024.95 c. 2680.3 d. 1286.25 e. 1271.55 f. 7403.7 b. The system proposed by the accounting manager. g. 2589.57 h. 5681.71 i. 24668 j. 11950 ...
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...Seligram and Managerial Accounting Wrap-Up 15.501/516 Accounting Spring 2004 Professor S. Roychowdhury Sloan School of Management Massachusetts Institute of Technology May 10, 2004 11 Seligram ETO ¾ ETO: A support department / cost center ¾ Who are ETO’s customers? – the departments producing ICA, ICB, Capacitor, Amplifiers and Diodes ¾ Customers have to bear the cost of maintaining and operating ETO. ¾ Any signs of problems? 12 Main Questions ¾ Is the current costing system – using direct labor dollar as the single allocation base - adequate? Are there signs in the case that it is not? ¾ Why does the current system exist? ¾ As time has passed, which kind of testing within ETO is actually causing overheads for other departments? What are overheads being allocated by? ¾ Therefore, getting which kind of testing (basic or advanced) done internally has a cost advantage over outside markets? Departments that use basic testing are “overcosted” Departments that use advanced costing are “undercosted” ¾ What happens if departments that are mainly getting basic testing done leave? Excess capacity – our old enemy, the death spiral 13 1 The Two Alternate Allocation Systems ¾ Each takes total overheads of $4,714k and splits it into two parts: 685k, to be allocated based on direct labor dollars 4,029k, to be allocated based on machine hours ¾ The second further splits the 4,029k into Main Test...
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...Seligram Write-up 1. What type of cost system is Seligram using? What are the symptoms of cost system failure at ETO? What caused the existing system at ETO to fail? Seligram is using a cost system that costs everything across the entire facility. The total overhead is summed together and divided by the total number of labor dollars to get one burden rate for the company. This doesn’t account for the variance in the individual testing costs for different products. In this situation, you will have some processes that are more labor intense while others require more expensive automated equipment to test. The shift towards more expensive testing equipment is what cased current system at ETO to fail. 2. Calculate the costs of the five components described in Exhibit 6 as reported by: a) The existing system b) The system proposed by the accounting manager c) The system proposed by the consultant 3. Would you treat the new machine as 1) a separate cost center or as 2) part of the main test room? Why? What would the machine hour burden rate be under each alternative (note: You do not have to estimate a new administrative burden rate). Under what circumstances, if any, would you change your choice? It would be better to treat the new machine as a separate cost center because to do otherwise would seriously skew the burden rate and not allow you to cost the work appropriately. Machine Burden Rate Main test room burden rate...
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...Seligram * They need to figure out the pricing to cover the cost * Get demand from customer, then complete the task * Customer decided the product mix * Now only one single pool, direct labor as cost driver, no longer accurate * We want to add cost pool and cost driver 1. allocate indirect cost to cost pools 2. use cost driver to allocate cost to product 1. allocate indirect cost to cost pools 2. use cost driver to allocate cost to product Overview: * ETO tests electronic components * No direct material costs * Requires more expensive and less labor intensive equipment Now they are using single cost pool: For every dollar you spent on direct labor, you allocate 1.45 dollar to overhead For every dollar you spent on direct labor, you allocate 1.45 dollar to overhead We at first assumed direct labor is proportional to machine hour. Therefore even direct labor goes down, machine hour goes down as well. However, we know some process needs more machine hour. Major flaw of the current system: * Only one cost pool * Direct labor is second stage allocation base * Existent system assumed that all products consume direct labor and overhead in the same proportion What changes does ETO face? * More automated, less labor needed * More complicated testing * Smaller and more frequent lots * Require more expensive equipment * Product diversity: some require the expensive equipment while others don’t Products are...
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...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...
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...Answer Key for Seligram, Inc. page 1 1. What business decisions at Seligram does the cost system support? In this context, what caused the existing cost system at Seligram (ETO) to fail? In general, a cost system supports the pricing decisions of the firm. ETO’s existing cost system contains only one cost center (the entire facility). All overhead is collected into a single cost pool, and the total overhead cost is divided by the total number of direct labor dollars consumed to give a single direct labor dollar burden rate. The major flaw in ETO’s existing system is that it assumes that all products consume direct labor and overhead in the same proportion. However, some products are produced on simple labor intensive equipment while others require very expensive automated equipment. Therefore, it is extremely unlikely that all products consume direct labor and overhead in the same proportion. As testing processes become more complicated, they require more expensive equipment and less labor-intensive equipment, which means that the proportion of costs due to overhead is increasing while the proportion of costs due to direct labor is decreasing. This caused the existing cost system to fail. 2. Calculate the reported costs of the five components described in Exhibit 6 under the three systems. 2a. Costs Under The Existing System: One Center System Product ICA ICB Capacitor Amplifier Diode Direct Labor $ 917 2051 1094 525 519 Overhead @ 145% ...
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...1. What caused the existing system at ETO to fail? The existing system at ETO began to fail because direct labor hours per lot began to decrease due to vendor certification that allows vendors to do the primary testing. In this way, ETO would only be required to test a small sample of each lot for verification purpose. In addition, as ETO increased its engineering support to enhance customer experience, a shift in labor mix from direct to indirect personnel was prompted. However, the existing system with a single cost pool could not provide such detailed information and therefore could not meet the expectation of the management. Another important factor to be considered is that as expensive equipment were introduced for automated tests, direct labors were reduced, creating a gap between a higher depreciation expense and the less direct labor to absorb it. It is common for a cost system to become obsolete when the process experiences increased automation. 2. Calculate the reported costs of the five components described in Exhibit 6 under: a) The existing cost system b) The system proposed by the accounting manager c) The system proposed by the consultant The cost for the five components described in exhibit 6 can be shown as follows: a) Using the given burden rate of 145%, the calculated costs of the existing system is shown in Exhibit 1. b) Using the manager’s proposal, the system would be separated by machine hour burden and direct labor burden. The revised...
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...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 |...
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...Trang Phung MPA 527 Professor Duran Seligram Case 1. What caused the existing accounting system at ETO to fail? * It is because of the single cost pool accounting system. * In the single cost pool system, all products consume direct labor and overhead in the same proportion. However, some products need more DL whiles other requires more automated machinery operation. * The trends of DL obsolescence also biased the calculation of burden rate, which causes the overall product costs assessment become misleading. 2. Calculate the reported costs of the five components described in the case using: a. The existing system- burden rate = 145% Burden rate 145% = Total Burden $/ DL$ * Burden$ = 145% x DL$ Product | DL$ | Burden$ | Total Costs | ICA | 917 | 1330 | 2247 | ICB | 2051 | 2974 | 5025 | Capacitor | 1094 | 1586 | 2680 | Amplifier | 525 | 761 | 1286 | Diode | 519 | 1272 | 1272 | b. The system proposed by the accounting manager- burden would be directly traced to two cost pools: machine-hour (machine-hour rate = $80.10) and DL burden (burden rate = 21%) Burden rate 21% = Total Burden $/ DL$ * Burden$ = 21% x DL$ Machine-Hour rate = Machine burden$/ Machine hours * Machine burden$ = Machine hours x Machine-hour rate Product | DL$ | Burden$ | Machine Hour | Machine Burden$ | Total Costs | | ICA | 917 | 193 | 18.5 | 1482 | 2591 | | ICB | 2051 | 431 | 40.0 | 3204 | 5686 | | Capacitor...
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...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 Direct Labor Burden Total Costs ICA 917 1,330 2,247 ICB 2,051 2,974 5,025 Capacitor 1,094 1,586 2,680 Amplifier 525 761 1,286 Diode 519 753 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 Direct Labor Burden Machine Hour Machine Burden Total Costs ICA 917 193 18.50 1,482 2,591 ICB 2,051 431 40.00 3,204 5,686 Capacitor 1,094 230 7.50 601 1,924 Amplifier 525 110 5.00 401 1,036 Diode 519 109 12.00 961 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 Direct Labor Burden Main Room Hour Mech. Room Hour Test Room Burden Total Costs ICA 917 193 8.50 10.00 1,665 2,774 ICB 2,051 431 14.00 26.00 3,815 6,297 Capacitor 1,094 230 3.00...
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...Q.1 – What caused the existing system at ETO to fail? The primary reason for the failure of Electronic Testing Operations’ (ETO) existing cost accounting system is ETO’s reliance on a labour-based overhead allocation system, which relied on an arbitrary cost-driver (i.e. overhead rate based on total pooled overhead costs and direct labour costs) (Turney, 1988, p. 2-3). The cost driver is based entirely on direct labour and assumes that all the components utilise direct labour and overheads in an equal proportion, but does not allocate overheads based on machine usage. Excluding this last point is not convenient due to the high utilisation of mechanical inputs that most of the components require (Turney, 1988, p.9). The labour-based overhead allocation system did not permit fluctuations in direct labour (for example, a decrease in direct labour hours dramatically increased the overhead rate across all customers) and thereby led to inaccuracy in determining costs (Turney, 1988, p.3). Since overheads constitute a huge proportion of the total costs, an inaccurate distribution of these overheads lead to inaccurate cost predictions and, in-turn, lead to unfavourable management decisions since managers have difficulties in identifying components that are unprofitable and products that are overpriced. The inaccuracy in allocation of overheads has increased over time due to the following factors: * Steady decline in the direct labour hours per lot tested as a result of (a) dependence...
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...The main drawback of the existing system is the assumption that all products used direct labor. This system measured direct labor and burden. Seligram’s entire facility was grouped into a single cost pool. (Cooper, 1999) The rate was based on direct labor hours; however, some products required machine hours. Burden costs were calculated by dividing the sum of testing and engineering labor to get the burden rate. (Cooper, 1999) To calculate the burden, each lot was multiplied by the associated direct labor dollars then by 145% of the burden rate. (Cooper, 1999) The total cost was determined by adding direct labor cost to the burden. THE EXISTING SYTEM: SINGLE COST POOL PRODUCT DIRECT LABOR OVERHEAD*145% TOTAL (DL+OVERHEAD) ICA $917 1329.65 2246.65 ICB 2051 2973.95 5024.95 CAPACITOR 1094 1586.3 2680.30 AMPLIFIER 525 761.25 1286.25 DIODE 519 752.55 1271.55 The single cost system began phase out due to an increase on vendor certification and just-in time delivery. This caused direct labor content and test lots to decrease. There was also a shift in inspection. Inspection service became more complex and required technology to screen and text complex items. (Cooper, 1999) The new technical components required automatic testing, longer test cycles and more data per part. (Cooper, 1999) Due to increased technology 30% of Seligram’s shipments were used by JIT deliveries. However, Selligram was more cost efficient for low-tech laboratories. ETO also provided support from...
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...Question 1 What caused the existing cost system at ETO to fail? o Cost system doesn’t match their complex business model • 200+ different standard process flows • 6,500 different software programs • 1,500 tools and fixtures • Multiple machines (number not specified) • Testing for 100’s and soon 1000’s of conditions o Yet they have a simple all-in-one cost system that uses a single metric (direct labor hours) to cost for every product type even though that metric is not unilaterally relevant to every product type Question 2 Calculate the reported costs of the five components listed in Exhibit 6 using: o The existing system. o The system proposed by the accounting manager. o The system proposed by the consultant. o See Exhibit A Question 3 Which system is preferable? Why? o The consultant’s proposal is the most preferable o Separates costs based on what activities are occurring in the testing of each product rather than blanketing those costs across all products regardless of testing processes/components Question 4 Would you recommend any changes to the system you prefer? Why? o Allocating costs by machine rather than just by machine hour • Different machines have different costs to buy, appreciate, run, etc. • This may be more complex than it’s worth and would only make sense if there was a significant difference in cost by machine o Standardize costs according to the type of test o Split into a 4th pool separating engineering overhead...
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