Seligram Essay

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Seligram, Inc.: Electronic Testing Operations 1. What caused the existing system at ETO to fail? In short, Seligram was using a single cost pool system. Using this system, all of Seligram’s products used DL and OH in the same proportion. However, this was a problem because some of the products needed more DL or OH available to them. Furthermore, because of this, the proportion of DL used to the proportion of direct machining used for each component weren’t the same, though they were are all being charged at the same rate. Shifting from labor-intensive testing to a more advanced machine-based testing system caused this single cost pool system to become obsolete, and was also expensive due to the cost of these advanced machines. This costing system drove up prices for customers so Seligram feared it would lose business. 2. Calculate the reported costs of the five components described in: a. The existing system Using the burden rate of 144.6% (given in exhibit 3), the costs of the existing system are: Product DL $ OH $ @ 144.6% Total Costs ICA $917 $1326 $2243 ICB $2051 $2966 $5017 Capacitor $1094 $1582 $2676 Amplifier $525 $759 $1284 Diode $519 $750 $1269 b. The system proposed by the accounting manager The accounting manager’s proposal uses a system that is separated by burden machine hours and burden direct labor. The effective burden rate/DL is 20% (according to exhibit 5), while the machine hour burden rate is $80.10 (also according to exhibit 5). Therefore, the costs of this system become: Product DL $ OH (DL $) DL$ x 20% OH $ OH (Machine Hours) Total Costs ICA $917 $183 $1480 18.5 $2591.42 ICB $2051 $410 $3200 40.0 $5685.71 Capacitor $1094 $219 $600 7.5 $2676 Amplifier $525 $105 $400 5.0 $1284 Diode $519 $104 $960 12.0 $1269 c. The system proposed by the consultant Product Direct Labor $ OH (DL$) OH (M/C Hours)

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