Seligram, INC The Seligram, INC. has provided electronic testing of various components since 1983. One of 11 divisions of the company, Electronic Testing Operations (ETO), has played a central role in the testing operations. However, technological advancement of testing and outdated machines have challenged the companys prospect in the industry. The main issue, in the introduction of the new equipment, Seligram needs to find optimal system to control overhead cost.
Q2 (a) Single burden pool Cost of five components under existing system Product Direct Labor$ Burden(DL*burden rate) Total cost(DL+ Burden) ICA $917 1 ,329. 65 $2,247 ICB $2,051 $2,973. 95 $5,025 CAPACITOR $1,094 $1 ,586. 30 $2,680 AMPLIFIER $525 $761. 25 $1,286 DIODE $519 $752. 55 $1,272 Total $12,510 (b) Two-burden pool accounting manager’s proposal E Burden Machine-hour Machine-burden Total Cost $183. 40 18. 5 $1,480. 00 $2,580. 40 $410. 20 $3,200. 00 $5,661. 20 $218. 80 7. 5 $600. 00 $1,912. 80 $105. 00 5 $400. 00 $1 ,030. o $103. 80 12 $960. 00 $1 ,582. 80 $12,767. 20 (c) Three burden pool consultant’s proposal Burden Main room-hour Mech. room-hour Test room burden Total cost 8. 5 10 $1,664. 69 $2,765. 09 14 26 $335. 14 $6,276. 34 3 4. 5 $696. 6 $2,009. 66 4 $365. 99 $995. 99 7 $1,006. 53 $1,629. 33 $13,676. 41 The Seligram, INC. should consider consultant’s three-overhead-pool system. Though cost of five components are not necessary lower than costs of traditional system, multiple cost pool have clearly reflect additional cost driver in ETO.
Two out of five components, as indicated in the chart, CADACITOR and AMPLIFIER, showed reduction in the overall costs. Also, further splits in overhead costs, Main Room and Mechanical overheads, decreased 67% of overhead cost of Cadacitor and 4% of overhead of Amplifier from costs of traditional approach. Such reductions suggest that cost pools have appropriately traced to each testing activities. Yet, the company can mix cost pools to improve costing analysis. Two components, ICA and ICB, show that they consume the most labor hours in both testing rooms.
In reality, cost analysis based on consult’s assessment, both costs increased 19% and 20% of the traditional costing system. Both components illustrated labor intensive nature; however, the multiple cost pools failed to reflect their illustrated nature. The overhead costs allocated to direct labor costs have proved to be the ideal cost analysis. In short, illustrated nature of activities may not necessarily match the assuming cost pools in these components. Q5 The new machine should consider as a separate cost center.
The ETO is investing a huge amount of money for one or two customers. The existing cost system transfers cost on other customers and increase the price, and drive them away. This is unfair. We can see it clearly in the appendix. In tablel, the new machine drives the machine rate much higher. In table2, the new machine rate dramatically varies in the first three years. It is unreasonable to simply add this burden to the exist burden, this can e shown on table2 (column Total new main room rate).
Since the direct labor of new machine is more expensive, we can add this to the new hour rate. This can make the new cost center easy to calculate. Given that the machine hour and burden of the main room and the mech. Room will not change in 8 years, we should use an integrated rate contained three parts in new machine cost pool. a) The sum of depreciation, engineering requirement, and fixed part of the estimated OH divided by the machine utilization hour, b) variable part of the estimated OH divided by the machine utilization hour c) DL cost per hour.