Seligram Case Essay Example

Q1) Seligram is using a single pool cost system. In the single cost pool system, all products consume direct labor and overhead in the same proportion. The problem with this is that some products need more direct labor while others require more automated machinery operation. Therefore, the proportion of direct labor used to the proportion of direct machining used for each component differs, while they are all being charged at the same rate. The shift in the industry from labor intensive testing to more technologically advanced machine based testing and reliance on vendor certifications caused the single pool cost system to become obsolete. Continuing to use the original cost system would drive the prices charged to customers up to a point where Seligram feared they would lose business.

Q2) The cost for the five components described in exhibit 6 can be shown as follows: a) The existing system: Using the given burden rate of 145%, the calculated costs of the existing system follows: Product | Direct Labor | Burden | Total Costs | ICA | 917 | 1,330 | 2,247 | ICB | 2,051 | 2,974 | 5,025 | Capacitor | 1,094 | 1,566 | 2,680 | Amplifier | 525 | 761 | 1,286 | Diode | 519 | 753 | 1,272 | | | | |

B) Using the manager’s proposal the system is separated by machine hour burden and direct labor burden. The revised labor burden rate is 21%, while the machine hr burden rate is $80.1. The calculated costs are updated as follows: Product | Direct Labor | Burden | Mach. hr | Mach. Burden | Total Costs | ICA | $917.00 | $192.57 | 18.50 | $1,481.85 | $2,591.42 | ICB | $2,051.00 | $430.71 | 40.00 | $3,204.00 | $5,685.71 | Capacitor | $1,094.00 | $229.74 | 7.50 | $600.75 | $1,924.49 | Amplifier | $525.00 | $110.25 | 5.00 | $400.50 | $1,035.75 | Diode | $519.00 | $108.99 | 12.00 | $961.20