Case Homework for Seligram, Inc.
The biggest issue with Seligram, Inc. is the obsolescence of its labor-based burden allocation process. Since there are two alternative systems that have been promoted, we need to examine and figure out which system works better.
First of all, clearly the labor-based burden allocation system is not working because it is using a single cost pool. As we can see from Exhibit 6, ICA’s Direct Labor Cost is 83.8% of CAPACITOR’s while ICA’s Total Machine Hours are 246% of CAPACITOR’s. If we just use a single cost pool and allocate burden only based on labor hours, we will be underestimate the cost of ICA.
Next, let’s compare the other two alternative systems. Based on Exhibit 5 & 6, we can calculate the different products cost association under each system as shown below: | Direct labor and Machine-Hour Requirements Actuals For One Lot | PRODUCT | DIRECT LABOR | MAIN ROOM | MAIN BURDEN | MECHROOM | MECHBURDEN | TOTAL HOUR | TOTAL BURDEN BY THREE-BURDEN-POOL PLAN | TOTAL BURDEN BY TWO COST POOLS PLAN | ICA | 917 | 8.5 | 538 | 10.0 | 1126 | 18.5 | 1664 | 1480 | ICB | 2051 | 14.0 | 887 | 26.0 | 2912 | 40.0 | 3799 | 3200 | CAPACITOR | 1094 | 3.0 | 190 | 4.5 | 504 | 7.5 | 694 | 600 | AMPLIFIER | 525 | 4.0 | 253 | 1.0 | 113 | 5.0 | 366 | 400 | DIODE | 519 | 7.0 | 443 | 5.0 | 563 | 12.0 | 1006 | 960 |
From the chart above we can see that there isn’t a big difference between a two cost pools plan and a three-burden-pool plan at this point. The only difference is that a two cost pools plan would be cheaper to conduct; so as of right now, the two cost pools plan will be the