Seligram Case Study

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Seligram, Inc. Assignment Questions 1. What caused the existing system at ETO to fail? 2. Calculate the reported costs of the five components 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? 4. Would you recommend any changes to the system you prefer? Why? 5. Would you treat the new machine as a separate cost center or as part of the main test room? Machine Hour Rate = $80.10 Burden Rate DL = 21% Accounting Manager wanted two cost pools 1st would include administrative and technical functions (division management, engineering, planning, administrative personnel) Charged Rate per Direct Labor Hour 2nd Cost Pool – All Other Burden cost and would be charged based on Machine Hours Consultant – Recommended Three Burden Pool System, Separate burden center for each test room, and common technical/ administrative pool. Burden directly traced to each pool. Burden cost in test rooms would be charged based on Machine Hours. Tech/Admin pool would be charged at direct labor hours The existing system failed because there was only one rate being used to calculate overhead, and this rate was solely based on direct labor hours. Some products require much more machine hours then direct labor hours. As you can see from the different breakdowns the machine hours are very costly, and as we automate things even further the overhead will not be assigned correctly. Something that requires much more machine hours will appear to have a lower cost, when in fact it could be costing the company a great deal more. The consultants system is the best out of the three because it most clearly directs costs to a pool. The machine hour rate due to overhead is a lot higher in the mechanical room then the main room. Therefore products that spend more hours in

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