Seligram Inc. Case Analysis

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 5,025Capacitor 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.

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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 1,589If 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 4. 50 697 2,021 Amplifier 525 110 4. 00 1.

00 366 1,001 Diode 519 109 7. 00 5. 00 1,007 1,635Among the three costing systems, we prefer the consultant’s proposal (Q3). The accounting manager treats the machine hours as separate cost pool because the automated operation process leads to large percentage of total cost comparing to direct labor. Measuring the machine hour costs can help us to assess the total burden more accurate.

However, given the same machine hours, the different hours spend in main room and mechanical room also incurs different costs. We can see from Exhibit 5 that mechanical room has higher unit cost per hour.Therefore, the three-cost-pool system can trace the costs back to the actual operation factors more clearly. (Q1) According to the two explanations shown above, the critical problem that causes ETO to fail is 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 direct labors while others require automated machinery operation. And the trends of direct labor obsolescence also biased the calculation of burden rate, which causes the verall product cost assessment become misleading. Managerial Accounting Case Study 2: Seligram, Inc: ETO Group 1 2 Although we prefer the consultant’s proposal, the three-cost-pool system still can be further improved by introducing another cost pool, the technical support costs (Q4).

Both the accounting manager and consultant regard the administrative and technical functions as the same cost factor. However, we think the technical support is very different in nature comparing with administrative cost. Each type electrical component which sent to ETO varies greatly in its complexity.For example, a keyboard IC is much simpler then a 3D graphic processing IC and requires less (or nearly no) technical support since keyboard IC is a matured product. Administrative cost usually includes general overhead such as indirect salaried employee, security, store/warehousing, telephones, and others.

If we classify the technical functions in the same cost pool as administration costs, then a keyboard IC and a 3D graphic processing IC share the same direct labor burden rate, which is not reasonable. Therefore we recommend a four-cost-pool system that separate technical support from general direct labor burden. Q5) From the data provided in Exhibit 5 and Exhibit 7, we can calculate the main test room burden rate if the new machine is included. The first year’s burden rate will be: Hours Variable Depreciation Other Total Old Machine 33,201 887,379 88,779 1,126,958 2,103,116 New Machine 400 100,000 500,000 225,000 825,000 Sum 33,601 987,379 588,779 1,351,958 2,928,116 Machine Hour Burden Rate $ 8 7. 14 (first year) And the remaining years’ burden rate: Hours Variable Depreciation Other Total Old Machine 33,201 887,379 88,779 1,126,958 2,103,116New Machine 2,400 100,000 125,000 150,000 375,000 Sum 35,601 987,379 213,779 1,276,958 2,478,116 Machine Hour Burden Rate $ 6 9.

61 (remaining years) The original burden rate calculated from three-cost-pool system is $63. 34. Both the first year ($87. 14) and remaining years’ ($69. 61) burden rate per machine hour are much higher, especially for the first year.

Since the new equipment is only needed by one or two customers in the foreseeable future, we should treat the new machine as separate cost center, or the new equipment will have a disastrous effect on ETO’s pricing structure.