Seligram

Points to Consider

Seligram, Inc.: Electronic Testing Operations

1. What caused the existing system at ETO to fail?

All product lots use DL and OH in the same proportion which is not realistic. Single cost pool system is not properly adjusted to shift in industry from labor intensive to more technologically automated machine testing and vendor certifications; proportions of DL and OH for each component differ. Current cost system drives burden rate charged to customers up because DL decreased w increased technology and automation testing.

2. Calculate the reported costs of the five compnents described in

a. The existing system

b. The system proposed by the accounting manager

c. The system proposed by the consultant

3. Which system is preferable? Why?

The consultants system – by treating each room (main and test room) as separate cost pools and then having technical and administrative as another pool, this system allocates costs most appropriately according to their actual cost drivers, instead of blanketing costs as the current system does.

4. Would you recommend any changes to the system you prefer? Why?

• Follow treating each room (main and test) as separate cost pools, but also separate administrative and technical costs into their own cost pools with respective correct cost drivers as this will help direct costs correctly. Different products require different mix of support.

• Allocate costs by machine rather than machine hour, since different machines have different costs (initial, running, etc)

5. Would you treat the new machine as a separate cost center or as part of the main test room?

Would treat new machine as separate cost center- if not, burden rate would be extremely distorted (high) due to start up and engineering costs, depreciation and very little direct labor.