Seligram Case Study Solutions
1) What caused the existing system at ETO to fail?
This system was based on the assumption that direct costs and overhead are consumed in the same proportion for all product testing. However, this is not the case and therefore the system failed. For example, due to the implementation of the vendor certification and the just-in-time delivery, some products are already tested and do not need any further tests, and ETO faces a decreasing number of the tests performed.
On the other hand, new components require more high technology tests. They consume highly automated equipment and require different testing procedures compared to other products.
2) Calculate the reported costs of the five components using:
a. The existing system
With a burden rate of 145%:
Burdenproduct = Direct Labourproduct x Burden Rate (in this case, 145%)
Total costsproduct = Direct Labourproduct + Burdenproduct
Product Direct Labour Burden Total Costs
ICA 917 1330 2247
ICB 2051 2974 5025
Capacitor 1094 1586 2680
Amplifier 525 761 1286
Diode 519 753 1272
b. The system proposed by the accounting manager
The accountant proposes a division into machine hour and direct labor burden. According to Exhibit 5, the new burden rate is 21% and the machine hour rate is $80,10.
Burdenproduct = Direct Labourproduct x Burden Rate (in this case 21%)
Machine Burdenproduct = Machine Hourproduct x Machine Hour Rate (in this case $80,10)
Product Direct Labour Burden Machine Hour Machine Burden Total Costs
ICA 917 193 18,5 1482 2591
ICB 2051 431 40,0 3204 5686
Capacitor 1094 230 7,5 601 1924
Amplifier 525 110 5,0 401 1036
Diode 519 109 12,0 961 1589
c. The system proposed by the consultant
The consultant proposes a three-burden-pool system, treating the main test room and mechanical test room as different cost pools. According to Exhibit 5, the costs would be:
• For the main test room burden rate: 2.103.116/ 33.201 = $63.34
• For the mechanical test room burden rate:
This system was based on the assumption that direct costs and overhead are consumed in the same proportion for all product testing. However, this is not the case and therefore the system failed. For example, due to the implementation of the vendor certification and the just-in-time delivery, some products are already tested and do not need any further tests, and ETO faces a decreasing number of the tests performed.
On the other hand, new components require more high technology tests. They consume highly automated equipment and require different testing procedures compared to other products.
2) Calculate the reported costs of the five components using:
a. The existing system
With a burden rate of 145%:
Burdenproduct = Direct Labourproduct x Burden Rate (in this case, 145%)
Total costsproduct = Direct Labourproduct + Burdenproduct
Product Direct Labour Burden Total Costs
ICA 917 1330 2247
ICB 2051 2974 5025
Capacitor 1094 1586 2680
Amplifier 525 761 1286
Diode 519 753 1272
b. The system proposed by the accounting manager
The accountant proposes a division into machine hour and direct labor burden. According to Exhibit 5, the new burden rate is 21% and the machine hour rate is $80,10.
Burdenproduct = Direct Labourproduct x Burden Rate (in this case 21%)
Machine Burdenproduct = Machine Hourproduct x Machine Hour Rate (in this case $80,10)
Product Direct Labour Burden Machine Hour Machine Burden Total Costs
ICA 917 193 18,5 1482 2591
ICB 2051 431 40,0 3204 5686
Capacitor 1094 230 7,5 601 1924
Amplifier 525 110 5,0 401 1036
Diode 519 109 12,0 961 1589
c. The system proposed by the consultant
The consultant proposes a three-burden-pool system, treating the main test room and mechanical test room as different cost pools. According to Exhibit 5, the costs would be:
• For the main test room burden rate: 2.103.116/ 33.201 = $63.34
• For the mechanical test room burden rate: