12-08-2018
Siemens Electric Motor Works
(A) & (B) Combined
ABC & Product Pricing Decision in
Multi Division Organization
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Understanding Organization
Structure (Mgmt cntrl st)
• Seven Major Groups (Business) and Five corporate
Divisions (Support Functions)
• Sales and EMW are geographically separate
• They are Autonomous Divisions and are evaluated
separately
• Sales covers ‘ markets’ by serving customers across
product types
• Both sales and EMW are called profit centers
(responsibility Structure)
• All A/C motors produced by EMW were sold exclusively
through sales division
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• Market for Standard Motors
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Cyclic Business – Dependent on Machine tool industry
Very Competitive
Must have lowest cost
Relatively simple to production technology
Long runs of standard motors/large volume orders
– Siemens is not completive here, but does business here
– See Exhibit 6/ 10 (for a&b combined)
• 44% of motors produced are for orders of 100 + motor, but
only 19% margin, generate only 8% of total contribution)
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• Market for custom motors
– A few large producers in European market
– Technology very important
– Relatively complex production process/flexible
manufacturing
– Short runs of custom motors/Small volume of orders
– Siemens competes here
– Exhibit 9/ 10 in a&b combined
• Contribution margins on order of 19 or less motors are 40%,
these orders generate 70% of total contribution.
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Siemens’ EMW Strategy
• Production of Small Lots of Custom Motors
• See Exhibit 3 to understand the product
• Siemens took large orders which may not be
profitable..
– To Build Customer Relationship
– Maintain Presence in the A/C motor
– To build competencies in the customized order and use
that for future orders
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• Changes in production and manufacturing
was envisaged.
– Increased Automation
– Flexible Mfg in Complicated production envt.
– Small volume of custom motors and large
volume of common components.
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Old Costing system
• 600 machine based cost centers
• Three allocation bases are used
– DM Direct materials to trace material cost
– Direct labor hours or machine hours to trace
manufacturing overhead
– Cost to date to allocate support overhead
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PROKASTA (new system)
• ?
• Two important changes
– Existing system retained, new cost systems is
an add on
– Simple system structure, two additional
allocation bases
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What will salesmen do?
• May encourage customers to order motors with fewer
customized component in order to lower the cost Or
• If customer wants high customization, sales man may want
customer to order in sufficiently large quantities to off set
the setup cost of soliciting and handling the order and
processing all the specialized components
• Thus attempting to get customers pay lot more for
customized order, ordered in small batches or to demand
less customization, however may ultimately undermine
Siemens EMW’s strategy to focus on the custom motor
business
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Key Questions
• Do you agree with Siemens’ Decision to set up
both sales and EMW as profit centers?
• What were the transfer pricing rules?
• What is the relationship between the cost of a
product as generated by product costing system,
the factory cost and its transfer price?
• Given the situation, if Herr Lotes asked for our
analysis and recommend course of action, what
would be your response?
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Learning summary
• How managers at Siemens EMW used their product costing system to
support their decision to change strategies?
• Change strategy required managers to evaluate many motor designs
and a way of accurately estimating the production cost of literally
thousand of potential product
• Responsibility Accounting and Transfer pricing to facilitate decision
making v/s performance evaluation
• Performance evaluation should be fair and drive goal congruence
• Performance of EMW v/s Manager v/s Siemens
• Financial Performance, Non Financial Performance, Competitiveness,
Contribution to Corporate, Productivity etc.
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Cont..
• Controllable and non controllable aspect in performance evaluation
• Management accounting and Costing system geared to support those
decisions under new strategy
• The new costing system provided the cost information for order
processing and handling components in a way traditional system did
not.
• By isolating those two cost and allocating them appropriately,
managers were able to get more accurate estimate of cost of producing
customer orders.
• Hence task of evaluation of orders and deciding which ones to accept
for production could be done more profitably
• Use of Costing (Full cost v/s Marginal Cost) for Pricing- LT or ST
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