Seligram, Inc.: Electronic Testing Operations Case Analysis
ETO Case Study Analysis
Seligram Incorporation, Electric Testing Operations (ETO) previously measured two components of cost: direct labor and manufacturing overhead. The existing cost system is very simple. Burden was grouped into a single cost pool that was combined with each of the testing rooms as well as the engineering burden costs related to software and tooling development and the administrating costs of the department. The total burden costs was then divided by the sum of testing and engineering labor dollars to obtain the burden rate per direct labor dollar. Burden was then calculated by multiplying 145% of the burden rate by the actual direct labor hours related with the lots. ETO added the computed burden to the actual direct labor costs to determine the lot’s total cost.
According to the calculations provided by ETO, the burden rate is equal to: (total burden $/ direct labor $)*100 = Effective Rate Calculation of Burden Rate | | | | Total burden costs | $4.713.982,0 | | | Total direct labor dollars | $3.260.015,0 | | | = | 4.713982,0/3.260.015,0*100 | = | 144,6% | | | Effective rate = | 145% | | |
The current cost system was satisfactory in the past because ETO used much more direct labor hours and therefore the burden rate was more valid than it is currently, although it was still not the best choice. ETO’s current cost system assumes that all products absorb direct labor and overhead in comparable ratios. In reality, some products require costly automated equipment while others are produced on labor-intensive equipment. Three primary reasons will show why the current cost system is no longer adequate for Electronic Testing Operations and that it needs to implement a new cost system to account for the changes that ETO is experiencing. 1. Because of the implantation of vendor certification, Seligram’s suppliers are doing the main testing on products and they do not require more testing once ETO receives
Seligram Incorporation, Electric Testing Operations (ETO) previously measured two components of cost: direct labor and manufacturing overhead. The existing cost system is very simple. Burden was grouped into a single cost pool that was combined with each of the testing rooms as well as the engineering burden costs related to software and tooling development and the administrating costs of the department. The total burden costs was then divided by the sum of testing and engineering labor dollars to obtain the burden rate per direct labor dollar. Burden was then calculated by multiplying 145% of the burden rate by the actual direct labor hours related with the lots. ETO added the computed burden to the actual direct labor costs to determine the lot’s total cost.
According to the calculations provided by ETO, the burden rate is equal to: (total burden $/ direct labor $)*100 = Effective Rate Calculation of Burden Rate | | | | Total burden costs | $4.713.982,0 | | | Total direct labor dollars | $3.260.015,0 | | | = | 4.713982,0/3.260.015,0*100 | = | 144,6% | | | Effective rate = | 145% | | |
The current cost system was satisfactory in the past because ETO used much more direct labor hours and therefore the burden rate was more valid than it is currently, although it was still not the best choice. ETO’s current cost system assumes that all products absorb direct labor and overhead in comparable ratios. In reality, some products require costly automated equipment while others are produced on labor-intensive equipment. Three primary reasons will show why the current cost system is no longer adequate for Electronic Testing Operations and that it needs to implement a new cost system to account for the changes that ETO is experiencing. 1. Because of the implantation of vendor certification, Seligram’s suppliers are doing the main testing on products and they do not require more testing once ETO receives