Siemens Electric Motor Works

Individual Case Study Siemens Electric Motor Works A

Competitive Environment The competition Siemens faced was extremely fierce, especially in the market for standard A/C motors. Low labor cost enabled the Eastern Bloc countries locate in an advantaged place and Siemens failed to lower its cost constantly. As a result, Siemens converted its strategy to be a customized motor producer from a standard motor producer. With large dedication in the environment and equipment, the production process became extraordinary automated and was able to yield more types of motors in relatively shorter production runs. Traditional Cost System In the old cost system, direct materials and direct labor were traced to individual product. These two were both variable costs and increased as the unit of the products increased. The overhead were categorized into three groups: materials overhead, production overhead and support related overhead. Material overhead arose from materials obtaining and was proportionately allocated to products according to their direct materials costs. Production overhead was assigned to 600 cost centers, which then distributed the cost to the products based on either direct labor hours or machine hours. Support related overhead was assigned to products in accordance with their manufacturing costs, and it accounted for 35% of the manufacturing costs. Problems of the Traditional Cost System As Siemens changed its strategy to produce more customized motors and less standard motors, the support overhead went up and was found not determined by the increased materials, labor hours and machine hours. Instead, it was more connected to the rise of the number of orders and the number of special components. The pitfalls of the traditional costing system, which believed the

support overhead was associated with manufacturing costs, appeared obvious. New Cost System The new cost system added two new cost pools—order processing cost pool and special components cost pool and...