cases 3

Seligram, Inc.: Electronic Testing Operations
Danwei Zhang
Jingyi Liu
Siyun Zhang
Yuxuan Xiao
2. Calculate the costs of the five components described in Exhibit 6 as reported by:
a) The existing system;
b) The system proposed by the accounting manager;
c) The system proposed by the consultant.
4. Would you recommend any changes to the system you prefer? Why?
System preferred
We prefer the cost system proposed by consultant for the following reasons:
Firstly, there is a trend of decline in the direct labor hours and test lots. Also, the test
procedure shifts from simple inspection services to broader-based test Technology. Besides,
more high-technology components have been introduced. These factors make the cost
become more related to machine time instead of labor hour. At the same time, burden will
increase with the additional depreciation and engineering costs associated with the new
equipment. This will result in a large increase in the burden rate per direct labor hour and the
cost will be enormously higher than that of other competitors. Therefore, we don’t choose
traditional costing system to keep our cost advantage.
Secondly, according to question 2, the main test room overhead rate is 64.4% and Mech.
Room Overhead rate is 112.6%. This means there are huge differences between these two
rates, and if we simply combine the machine hours and burden costs to calculate the
machine hour rate, the result will not be accurate.
Therefore, we choose cost system c instead of cost system b and a.
Changes and why
Cost from new test equipment, such as depreciation and engineering costs, should be
removed from total Engineering & Administrative Burden.
The original allocation causes a relative high burden rate per direct labor dollar, which does
not accurately reflect the actual cost pattern. Depreciation and engineering cost of new
equipment have no correlation with labor hour fluctuation. Therefore, those costs related to
new machine should be taken away from E&A burden.
5. Would you treat the new machine as a separate cost center or as part of the main
test room? Explain.
I would treat the new machine as a separate cost center of the main test room.
As shown in the table above, if the new machine is integrated into Main test room, machine
hour rates in the following eight years will be higher than Main test machine-hour rate(63.3).
Then the total cost of the products will increase as well as the selling price.
The case also told us the new equipment would only be needed to service the requirements
of one or two customers in the foreseeable future. The increasing machine hour rate will
result in an increase in charges to other customers and drive them away.
Therefore, it would be better to treat the new machine as a separate cost center due to the
cost consideration.