Seligram Case Study Essay Sample

There are chiefly three factors taking to the failure of the bing system at ETO. First. there has been a steady diminution in direct labour hours per tonss and fewer trial tonss. Such a diminution is chiefly due to an increased dependance on seller certification. which is a cardinal constituent of JIT bringing. Number of trials being done by ETO reduces because the providers did the testing by themselves. Second. there is a displacement from simple review services to broader-based trial engineering. Although ETO provides technology supports on complex parts. outside proving services are even cheaper. esp. on big tonss when merely simple testing is required. Last. the bing testing equipment is acquiring out-dated and is unable to get by with the gait with new developments in high-technology constituents. Besides. the really expensive extremely machine-controlled equipment is required to prove the new high-technology constituents. That equipment provides longer trial rhythms and more trial informations per portion. Such an increased mechanization would cut down direct labour needed to absorb depreciation costs for ETO.

Charges for proving travel up due to an addition in burden rates. Therefore. ETO notices that the figure and frequence of ailments from the clients are amplified.

Question 2

The Reported Cost of 5 Components under the Existing System

ProductDLBurden=DL*Burden RateAllocated Overhead

ICA $ 917 $ 917*1. 452246. 65

ICB20512051*1. 455024. 95

Capacitor10941094*1. 452680. 3

Amplifier525525*1. 451286. 25

Diode519519*1. 451271. 55

Total:12509. 7

The Reported Costs of the 5 Components under the System proposed by the Accounting Manager ( Two-Cost Pool )

ProductDirect Labor $ DL $ RateMachine HourMachine Hour RateAllocated Overhead

IC A9171100. 418. 514802580. 4

IC B 20512461. 24032005661. 2

Capaciter10941312. 87. 56001912. 8


Diode519622. 8129601582. 8

Total12767. 2

Reported costs of the five constituents described in the system proposed by the adviser

ProductDL DL rate * 0. 2Main Test * 63. 34Mech. Test * 112. 63TOTAL

IC A917183. 4538. 391126. 32765. 09

IC B2051410. 2886. 762928. 396276. 34

CAP. 1094218. 8190. 02506. 8532009. 673

AMP. 525105253. 36112. 63995. 99

DIO. 519103. 8443. 38563. 151629. 33

Total13676. 423

As for the comparing of the 3 methods used. the first method. the bing 1. would comparatively bias against occupations with high direct labour cost but low machine hours. But for the 2nd method. the one proposed by the accounting director. penalizes occupations with comparatively more chief machine hours than mechanical machine hours. The 3rd method. the one proposed by the adviser. is comparatively the best among the three as it divides direct labour cost from the machine cost ( Main-Test Room and Mechanical Test Room ) . which makes more sense and more just. giving a more accurate estimation. The downside of it. 1000. is that this method would increase the entire cost

As for recommendation. we would propose the company to apportion their cost harmonizing to the existent use of the stuff. With the cost being driven by the ingestion of the resources. the production capacity is likely to be at it’s fullest as it utilizes the resources more expeditiously. It besides has a higher opportunity of ciphering the true cost of a merchandise which would take to better direction determination.

Question 3:

Under the bing system. whether the fabricating division of Seligram should be required to buy their proving from ETO depends on the simplicity/ complexness of the review services. Since “low technology” outside research labs is frequently cheaper. particularly on big tonss. the division should be required to buy the proving from outside services. On the other side. since “complex parts” require sophisticated technology resources in which ETO has its competitory advantage in making that. Therefore. ETO could supply cheaper. rapid and cost-efficient technology services. the divisions should buy their proving from ETO. Furthermore. the bing accounting system may profit these “complex parts” by apportioning relatively low fabricating operating expense of ETO to those complex parts.

Under the new cost accounting systems. the divisions should buy their testing for both low and high engineering parts from ETO. Implementing two- and three-burden-pool systems utilize separate load centres for accounting could apportion the load costs based on machine hours and rate per direct labour dollar. Both of the new systems are more sensible and relevant than the bing one in footings of load costs on machine and direct labour. Although the apportioning cost for the “complex parts” would hold a relatively higher load of overhead allotment than that of the original accounting system. this higher per centum of allotment would truly reflect their cost of review. Therefore. it would let directors to do better determination since the allotment of overhead cost is more sensible and relevant.

Question 4

If we include the new machine in the chief trial. the new Main test’s load rate:

= [ Original load + ( First twelvemonth Depreciation cost + Engineering demands + Estimated operating expense ) ] / ( original machine hr + new machine use )

= 2103116+ ( 500000+75000+250000 ) = 2928116

= 2928116 / ( 33201+400 ) = 87. 14

The cost allotment would be as follows:

@ DLDL Rate * 0. 2 Main Test * 87. 14Mech Test * 112. 63Total

ICA917183. 4740. 691126. 32967. 39

ICB2051410. 21219. 962928. 386609. 54

CAP. 1094218. 8261. 42506. 8532081. 073

AMP. 525105348. 56112. 631091. 19

DIO. 519103. 8609. 98563. 151795. 93

Entire @ @ @ @ 14545. 123

The above method merely multiplies the original chief trial machine hours by the new chief trial load rate. However. non all the occupations would utilize this new machine. Besides. the “machine hours” of the chief room assigned to the above merchandises would be different from those of the new machines. Therefore. this method over simplified the state of affairs by apportioning the cost harmonizing to the original machine hours.

To undertake this issue. we could handle the new machine as a separate cost centre. In this scenario. we would merely use 10 % of the new machine. Therefore. the entire 1st twelvemonth hours of the new machine use would be equal to 4000hrs*10 % . The load rate assigned to the merchandises would be calculated as follows:

( First twelvemonth Depreciation cost + Engineering demands + Estimated operating expense ) /total hours*utilization per centum

$ 825. 000 / ( 4000hr*10 % ) = $ 2062. 5 per hr

The new machine’s load rate would be allocated harmonizing to the occupations which really use it. In other words. we merely allocate the cost of machine to the relevant occupations. As a consequence. the cost allotment would be based on the relevant activities and could be more dependable.

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