Seligram Case Study

Seligram, Inc., Case Summary

Industry and its relevant characteristics

Electronic Testing Operations (ETO), a cost centre of Seligram,Inc. found in 1983. Its main duty was provided centralized testing for electronic components such as integrated circuits.

Competitive Environment

Because of the implementation of the vendor certification and the Just-In-Time delivery, Seligram’s suppliers did the primary testing of components. This let to fewer test lots received by ETO. At the same time, Low- technologies outside laboratories were cheaper than ETO due to no engineering support. Finally, ETO has to shift from simple inspection services to more technically sophisticated services.

Production Process

ETO was producing ICA, ICB, Capacitor, Amplifiers and Diodes.

Description of the old cost system

ETO’s existing cost system measured direct labor and burden. However, burden is allocated to a single cost pool that includes all burden costs and divided by direct labor dollars to obtain the burden rate (Traditional costing system).

The accounting manager proposed a new cost system which was divided burden into two cost pools. The first pool would include burden related to the administrative and technical functions and would be charged on direct labor dollar. The second pool would include all other burden and would be charged on machine hours (ABC systems).

The consultant proposed a three-burden-pool system. There were Main Test Room, Mechanical Test Room and technical and administrative. The costs also based on machine-hours and direct labor dollar (ABC systems).

Possible problems with the old cost system

* The ETO’s existing cost system only one cost centre which caused the overhead cost inaccurate.

* The current system Require more direct labor and equipment time.

* Price charged to customers will increase

Possible opportunities for change

* A- four-cost pool system that separate technical support costs from the actual direct labor costs.