Siemens Electric Motor Works a

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Background: The Electric Motor Works (EMW) was a part of the largest group, Energy and Automation. The original Siemens EMW was built to manufacture refrigerator motors, and there are two types, standard motors and customized motors. Through 1970s, EMW had 80% of sales volumes which was mainly for standard motors and another 20% was customized motors. Around this period, the competition for standard motors had increased dramatically at this market. Moreover, the production of this type of motors was long run, which means this process needed much labor costs and spend a lot of time to produce one. In the meanwhile, due to this problem, EMW cannot lower their costs sufficiently to compete with other competitors who was relatively on a lower rate of labor costs. Therefore, the manager had to redesign a new strategy to gain profit. They found EMW had advantages on producing low volume, customized A/C motors, and this process of production was short run, but needed high level of automated machines and this cost a lot of money. According to this new strategy, EMW had devised a new costing system to make profit. Problems and issues: The traditional cost system they were using during that time was suitable for standard motors. The direct material and direct labor costs were assigned directly to the products. The total manufacturing overhead costs were consisted of materials related overhead, production related overhead and support related overhead, and under the traditional costing system calculation, support related overhead was 35% of other manufacturing costs. Just two years after EMW changed their strategy, there was a problem arising with the traditional cost system which was that this system treated standard motor as well as customized motor and it cannot tell which model was most needed and how many of it, especially for this product mixed
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