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# Seligram Case Essay

581 words - 3 pages

Trang Phung
MPA 527
Professor Duran
Seligram Case

1. What caused the existing accounting system at ETO to fail?
* It is because of the single cost pool accounting system.
* In the single cost pool system, all products consume direct labor and overhead in the same proportion. However, some products need more DL whiles other requires more automated machinery operation.
* The trends of DL obsolescence also biased the calculation of burden rate, which causes the overall product costs assessment become misleading.

2. Calculate the reported costs of the five components described in the case using:
a. The existing system- burden rate = 145%
Burden rate 145% = Total Burden \$/ DL\$
* Burden\$ = 145% x DL\$
Product | DL\$ | Burden\$ | Total Costs |
ICA | 917 | 1330 | 2247 |
ICB | 2051 | 2974 | 5025 |
Capacitor | 1094 | 1586 | 2680 |
Amplifier | 525 | 761 | 1286 |
Diode | 519 | 1272 | 1272 |

b. The system proposed by the ...view middle of the document...

0 | 961 | 1589 | |

c. The system proposed by the consultant- three-burden-pool system, treats the main test room (burden rate = \$63.34) and mechanical test room as different cost pools (burden rate = \$112.63).
Test room Burden\$ = (Main Room hour x main room burden rate) + (mechanical room hour x test room burden rate)
Product | DL\$ | Burden\$ | Main Room Hour | Mechanical Room Hour | Test Room Burden | Total Costs | |
ICA | 917 | 193 | 8.5 | 10.0 | 1665 | 2774 | |
ICB | 2051 | 431 | 14.0 | 26.0 | 3815 | 6297 | |
Capacitor | 1094 | 230 | 3.0 | 4.5 | 697 | 2021 | |
Amplifier | 525 | 110 | 4.0 | 1.0 | 366 | 1001 | |
Diode | 519 | 109 | 7.0 | 5.0 | 1007 | 1635 | |

3. Which system is preferable? Why?
* Among the three costing system, we prefer the consultant’s proposal.
* Because using the three-cost-pool system, we can trace the costs back to the actual operation factors more clearly.
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? Why?
* The main test room burden rate is calculated as below if the new machine is included:
| Hours | Variable | Depreciation | Other | Total |
Old Machine | 33201 | 887379 | 88779 | 1126958 | 2103116 |
New Machine | 400=4000x.10 | 100000 | 500000 | 225000=75k+150k | 825000 |
Total | 33601 | 987379 | 588779 | 1351958 | 2928116 |
Machine Hour Burden rate = Total Burden\$/Machine Hours= 2928116/33601=\$87.14

* The remaining years’ burden rate:
| Hours | Variable | Depreciation | Other | Total | | | | | | |
Old Machine | 33201 | 887379 | 88779 | 1126958 | 2103116 | | | | | | |
New Machine | 2400=4000x.60 | 100000 | 125000 | 150000(fixed) | 375000 | | | | | | |
Total | 35601 | 987379 | 213779 | 1276958 | 2478116 | | | | | | |
Machine Hour Burden rate= 2478116/35601= \$69.61
* The original burden rate calculated from the three-cost-pool system is \$63.34. both the first year and remaining years’ burden rate per machine hour are much higher, especially the first year. Since the new equipment is only needed by one or two customers, we should treat the new machine as separate cost center. Otherwise the new machine will have a big effect on ETO’s pricing structure.

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