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:
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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
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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
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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
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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
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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
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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
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Class 2: Seligram ETO (provide answers to all questions marked with a ‘*’ in your case writeup. See syllabus for instructions on format and page length of report) 1. (*) What type of cost system is Seligram using? It is using the traditional cost system also called the Full Absorption cost . This is the financial cost system historical cost analysis system . 2. What are the symptoms of cost system failure at ETO? As we learned in chapter 7 initially,”… cost systems designs were simple…“(Brewster
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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
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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
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