Seligram Case Study

Presented To: Dr. Khaled Hegazy

Presented By: Mona Abdallah
Student ID: 131239

Question 1:
What caused the existing system at ETO to fail?
The existing cost system failed because of four main
reasons.
1-The existing cost system is related to direct labor hour.
One cost pool used for cost allocation under assumption:
All product lots use direct labor and Overhead in the
same proportion.
2- Cost system doesnt match the complex business
model.
3- New trends in the testing procedures (Vendor
certification which lead to reduce the number of tests
performed by ETO)
4- Change of technology (new high technology
components required new advanced machines with more
automatic and longer testing )

Question 2:

2. Calculate the reported costs of the five components

described in:

Without New machine :

a) The existing system:
One burden Pool :
1- Effective Burden Rate: 145%
Product cost = Direct Labor $ + (Direct Labor $ * burden
rate)
ICA
ICB

= 917 + (917*145%) = 2246.65 $

=2051+(2051*145%) = 5024.95 $

CAPACITOR =1094+(1094*145%) = 2680.3 $

AMPLIFIER

=52 5+(525*145%)

= 1286.25 $

DIODE

=519 +(519*145%)

= 1271.55 $

Five Products total cost = $ 12509.70

b) The system proposed by the accounting manager:

The two-burden-pool :
1- Effective Machine-Hour Rate = $80.00
2- Effective Burden Rate Per Direct Labor $ = 20%

Product cost = Direct Labor $ + (Direct Labor $ * burden

rate) + (Total machine hours *Machine-Hour Rate)

ICA
$

= 917 + (917*20%)+ (18.5*80) = 2580.40

ICB
$

=2051+(2051*20%)+ (40*80) = 5661.20

CAPACITOR =1094+(1094*20%)+ (7.5*80) = 1912.80

$
AMPLIFIER

=525+(525*20%)+ (5*80)

DIODE
$

=519 +(519*20%)+ (12*80)

Five Products total cost =$ 12767.20

= 1030 $
= 1582.80

c) The system proposed by the consultant:

The three-burden-pool :
1- Effective Burden Rate Per Direct Labor $ = 20%
Effective Machine-Hour Rate:
2- Main Test Room= Burden $ / Machine HRS =
2103116/33201 = 63.34
Effective Rate = 63$

3- Mechanical Test Room: 1926263/17103 = 112.63

Effective Rate = 113$

Product cost = Direct Labor $ + (Direct Labor $ * burden rate) +

(Main Test room machine hours* Main test Machine-Hour Rate) +
(Mechanical Test room machine hours* Mechanical test MachineHour Rate)

ICA
= 2765.90 $

= 917 + (917*20%)+ (8.5*63) + (10*113)

ICB
= 6281.20 $

=2051+(2051*20%)+ (14*63) + (26*113)

CAPACITOR =1094+(1094*20%)+(3*63) + (4.5*113)

= 2010.30 $
AMPLIFIER
995.00 $

=525+(525*20%)+(4*63) + (1*113) =

DIODE
1628.80 $

=519 +(519*20%)+(7*63) + (5*113) =

Five Products total cost =$ 13681.20

With New machine :
a) The existing system:
One burden Pool :
Effective Burden Rate=
Total burden after adding cost of new machine / Total direct labor
$

= 4713982+250000/ 3260015 = 1.52 *100 = 152%

Product cost = Direct Labor $ + (Direct Labor $ * burden
rate)
ICA
ICB

= 917 + (917*152%) = 2310.84 $

=2051+(2051*152%) = 5168.52 $

CAPACITOR =1094+(1094*152%) = 2756.88 $

AMPLIFIER

=52 5+(525*152%)

= 1323.00 $

DIODE

=519 +(519*152%)

= 1307.88 $

Five Products total cost = $ 12867.12

b) The system proposed by the accounting manager:

The two-burden-pool :
1- Machine-Hour Rate =
New test room burden after adding new machine / Total
Machine hours

= 4029379 + 250000 / 50304 = 85.07

Effective Machine-Hour Rate = 85 $
2- Effective Burden Rate Per Direct Labor $ =
20%

Product cost = Direct Labor $ + (Direct Labor $ * burden

rate) + (Total machine hours *Machine-Hour Rate)

ICA
$

= 917 + (917*20%)+ (18.5*85) = 2672.90

ICB
$

=2051+(2051*20%)+ (40*85) = 5861.20

CAPACITOR =1094+(1094*20%)+ (7.5*85) = 1950.30

$
AMPLIFIER

=525+(525*20%)+ (5*85)

DIODE
$

=519 +(519*20%)+ (12*85)

= 1055.00 $
= 1642.80

Five Products total cost =$ 13182.20

c) The system proposed by the consultant:

The three-burden-pool :
1- Effective Burden Rate Per Direct Labor $ = 20%
Effective Machine-Hour Rate:
2- Main Test Room= New Burden $ / Machine HRS =
2103116 +250000 /33201 = 70.87
Effective Rate = 71$
3- Mechanical Test Room: 1926263/17103 = 112.63

 Effective Rate = 113$

Product cost = Direct Labor $ + (Direct Labor $ * burden rate) +
(Main Test room machine hours* Main test Machine-Hour Rate) +
(Mechanical Test room machine hours* Mechanical test room
Machine-Hour Rate)

ICA
= 2833.90 $

= 917 + (917*20%)+ (8.5*71) + (10*113)

ICB
= 6393.20 $

=2051+(2051*20%)+ (14*71) + (26*113)

CAPACITOR =1094+(1094*20%)+(3*71) + (4.5*113)

= 2034.30$
AMPLIFIER
1027.00 $

=525+(525*20%)+(4*71) + (1*113) =

DIODE
1684.80 $

=519 +(519*20%)+(7*71) + (5*113) =

Five Products total cost =$ 13973.20

Question 3:
3. Which system is preferable? Why?
The consultants proposal is the most preferable
Because it allocates costs based on what activities are

incurred in the testing of each product rather than

dividing those costs across all products regardless of
testing processes/components.

Question 4
Would you recommend any changes to the system you
prefer? Why?
1- Allocating costs by machine rather than just by
machine hour
Because :
- Different machines have different costs to buy,
setup , depreciate, run. But must take into consideration
that this s may be more complex than its worth this
should be considered only if there a big difference in cost
by machine.
2- Separating engineering overhead costs from G&A
overhead costs

Question 5
Would you treat the new machine as a separate cost
center or as part of the main test room? Why?
Yes should be trated as a separate cost center
As stated in the case there is a potential loss of 25% of
customer base by allocating new costs to main test room.

So it is not recommended to allocate additional burden

and raise price of current products.