Case 3: Seligram, Inc. Group: Question 2: (a) Burden on labor cost basis Product Burden $ Total ICA 917. 00 1329. 65 2246. 65 ICB 2051 . 00 2973. 95 5024. 95 Capacitor 1094. 00 1 586. 30 2680. 30 Amplifier 525. 00 761 . 25 1286. 25 Diode 519. 00 752. 55 1271 . 55 (b) Burden on two cost pools basis Proposed by MA Burden on MH Total cost Burden 80$/MH 183. 40 2580. 40 410. 20 3200 5661 . 20 218. 80 1912. 80 105. 00 1030. 00 103. 80 1 582. 80 Effective Machine-hour rate = test room burden/total machine hours= Burden on three cost pools basis Main room burden
Mech. room burden Total Cost 63$/MH 113$/MH 535. 5 1130 2765. 90 882 80. 00 (C) 6281 . 20 189 508. 5 2010. 30 252 113 995. 00 441 565 1628. 80 *Calculate the machine hour rate of each room Machine hours Machine hour rate Main Test room 2103116 33201 Mechanical test room 1926263 17103 4029379 50304 176 Question 3& 4: We prefer the system proposed by the consultant. Because the flaw in the current system is that the system stands in a spending perspective, which allocate all overhead to all product at the same rate.
However, some products are produced on imple 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. It will easily lead toa death spiral. When testing process become more complicated, more expensive equipment are needed ana less laDor cost are Involved, cost 0T eacn product wlll grow as tne allocatlon rate grows(OH increase and DL decrease), and customers frightened by the high cost will decrease, which will lead to another increase in the cost of each product.Order now
Though the econd system identified DL and MH as cost drivers, we still think the system proposed by consultant is better than the accounting manager. Because not all component require both mechanical test and electronic test, allocate all overhead from 2 test rooms to all component isn’t reasonable. (Q3) Although we prefer the consultant’s proposal, the three-cost-pool system still can be improved by separating the technical support costs from the existing pool, forming a dependent pool (Q4).
Each type of component required separate software development, custom tools and ixtures that were developed by the engineering group. DL can hardly be the cost factor. Besides, a shift to more technically sophisticated service indicates that engineering burden would be a quite important component of the total cost in each product. So we suggest that we need to figure out a new cost factor. We suggest that we can take a weighed-average method which give different weights to different products based on their different degree of dependence on the engineering group their dependence on technique.
We can ask the production manager data of the xtent the product relies on engineering. Then we can allocate the engineering burden to each product. Therefore we recommend a four-cost-pool system that separate technical support from general direct labor burden. Question 5 We would like to treat the new machine as a separate cost center. We can use the burden rate to make decision. If the new burden rate of the new machine included in the main test room is lower than the burden rate of main test room before, we can accept the inclusion.
However, if the new burden rate is higher, we must reject the nclusion and treat it as a separate cost center. So we use the data based on 1988 plan in Exhibit 5 to calculate the new burden rate, which the new machine is included. (1) The first year Machine Hour Variable Depreciation Other Old machine 33,201 887,379 88,779 Z103,116 New machine 1 oo,ooo 500,000 225,000 825,000 33,601 987??79 588,779 2928,116 Machine-hour rate??”test room burden/machine hour=2928116/33601=87. 4 Effective Machine-Hour Rate=$87 From the third year, the new machine’s utilization rise to 60% and in all subsequent ears (2) Subsequent years Year Machine hour Effective machine-hour rate 887??79 3 2,400 281 ,250 1 50,000 533,650 $74 Sum 35,601 370,029 2636,766 4 New macnlne 210,000 462,400 $72 298,779 2565,516 5 160,000 412,400 $71 248,779 2515,516 6 7 8 1 53,750 406,150 $70 242,529 2509,266 From the question 2, we have already known that the Effective Machine-Hour Burden Rate of Main Test Room under consultant’s three-pool method is $63.
Nevertheless, in the new machine inclusion analysis presented above, the first year’s burden rate is $87. Although the total cost of new machine will steadily decline in subsequent years because of the accelerated depreciation and the missing of installation and programming cost, in the table data the rates of subsequent years are all above $70.
So we should object the inclusion method. And more important is the new machine is worked only for a small amount of customer. It is unfair for other customer whose components also tested in main test room to bear this burden, which make customers go away. In conclusion, we should set a separate cost center Tor tne new macnlne