Seligram Case
1. What business decisions at Seligram does the cost system support? In this context, what caused the existing cost system at Seligram (ETO) to fail?
In general, a cost system supports the pricing decisions of the firm. ETOs existing cost system contains only one cost center (the entire facility). All overhead is collected into a single cost pool, and the total overhead cost is divided by the total number of direct labor dollars consumed to give a single direct labor dollar burden rate. The major flaw in ETOs existing system is that it assumes that all products consume direct labor and overhead in the same proportion. However, some products are produced on simple labor intensive equipment while others require very expensive automated equipment. Therefore, it is extremely unlikely that all products consume direct labor and overhead in the same proportion. As testing processes become more complicated, they require more expensive equipment and less labor-intensive equipment, which means that the proportion of costs due to overhead is increasing while the proportion of costs due to direct labor is decreasing. This caused the existing cost system to fail.
2. Calculate the reported costs of the five components described in Exhibit 6 under the three systems.
2a. Costs Under The Existing System: One Center System
Product
Direct Labor $
Overhead @ 145%
Total
Capacitor
Amplifier
Diode
2b. Costs Under The Proposed System from the Accounting Manager: Two Center System
Product
Direct Labor $
Overhead $
Overhead (Machine Hrs.)
Overhead (Direct Labor $)
Total