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 doesn’t 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
= 917 + (917*145%) = 2246.65 $
ICB
=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)
= 1030 $
DIODE
=519 +(519*20%)+ (12*80)
= 1582.80 $
Five Products total cost =$ 12767.20
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= 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 Machine-Hour Rate)
ICA
= 917 + (917*20%)+ (8.5*63) + (10*113) = 2765.90 $
ICB
=2051+(2051*20%)+ (14*63) + (26*113) = 6281.20 $
CAPACITOR =1094+(1094*20%)+(3*63) + (4.5*113) = 2010.30 $
AMPLIFIER
=525+(525*20%)+(4*63) + (1*113) = 995.00 $
DIODE
=519 +(519*20%)+(7*63) + (5*113) = 1628.80 $
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
= 917 + (917*152%) = 2310.84 $
ICB
=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)
= 1055.00 $
DIODE
=519 +(519*20%)+ (12*85)
= 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
= 917 + (917*20%)+ (8.5*71) + (10*113) = 2833.90 $
ICB
=2051+(2051*20%)+ (14*71) + (26*113) = 6393.20 $
CAPACITOR =1094+(1094*20%)+(3*71) + (4.5*113) = 2034.30$
AMPLIFIER
=525+(525*20%)+(4*71) + (1*113) = 1027.00 $
DIODE
=519 +(519*20%)+(7*71) + (5*113) = 1684.80 $
Five Products total cost =$ 13973.20
Question 3:
3. Which system is preferable? Why?
The consultant’s 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.