Seligram Case Study Solutions - 1278 Words

1) What caused the existing system at ETO to fail? This system was based on the assumption that direct costs and overhead are consumed in the same proportion for all product testing. However, this is not the case and therefore the system failed. For example, due to the implementation of the vendor certification and the just-in-time delivery, some products are already tested and do not need any further tests, and ETO faces a decreasing number of the tests performed. On the other hand, new components require more high technology tests. They consume highly automated equipment and require different testing procedures compared to other products. 2) Calculate the reported costs of the five components using: a. The existing system With a†¦show more content†¦room hourproduct x Mech. room hour burden (in this case $112,63) Test room burdenproduct = Main room burdenproduct + Mechanical room burdenproduct Product Direct Labour Burden Main room hour Mech room hour Test room burden Total costs ICA 917 193 8,5 10,0 1665 2774 ICB 2051 431 14,0 26,0 3815 6297 Capacitor 1094 230 3,0 4,5 697 2021 Amplifier 525 110 4,0 1,0 366 1001 Diode 519 109 7,0 5,0 1007 1635 3) Which system is preferable? Why? Between the 3 options, the consultant’s system is preferable because it demonstrates the cost allocation more accurately. The accounting manager proposes two cost pools, treating the machine hours as a 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 accurately. However, given the same machine hours, there are different hours spend in the main room and in the mechanical room, with different costs. We can see from Exhibit 5 that the 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. 4) Do you recommend any changes or enhancements to your preferred system? Why? We would recommend creating a 4 cost pool, separating the technical support from the administrative support. The increased number of cost centers can show