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    Seligram Case Questions

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    Zain Bharwani
    The existing cost system at ETO uses a 145% burden rate that is applied to direct labor costs. This lumps together different overhead costs. The accounting manager proposes a new two-pool system that separates administrative/technical overhead costs, which are applied per direct dollar, from other overhead costs, which are applied per machine hour. This new system will provide more accurate costs by tying specific overhead costs to the underlying cost drivers of either direct labor or machine hours. High-technology products that have long machine cycles but less direct labor will show higher costs, while low-technology simple parts will show lower costs under the new system. Having more accurate costs will make ETO more profitable by reducing under- and over-estimating of expenses

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    Seligram Case Questions

    Uploaded by

    Zain Bharwani
    2K views2 pages
    The existing cost system at ETO uses a 145% burden rate that is applied to direct labor costs. This lumps together different overhead costs. The accounting manager proposes a new two-pool system that separates administrative/technical overhead costs, which are applied per direct dollar, from other overhead costs, which are applied per machine hour. This new system will provide more accurate costs by tying specific overhead costs to the underlying cost drivers of either direct labor or machine hours. High-technology products that have long machine cycles but less direct labor will show higher costs, while low-technology simple parts will show lower costs under the new system. Having more accurate costs will make ETO more profitable by reducing under- and over-estimating of expenses

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    The existing cost system at ETO uses a 145% burden rate that is applied to direct labor costs. This lumps together different overhead costs. The accounting manager proposes a new two-pool system that separates administrative/technical overhead costs, which are applied per direct dollar, from other overhead costs, which are applied per machine hour. This new system will provide more accurate costs by tying specific overhead costs to the underlying cost drivers of either direct labor or machine hours. High-technology products that have long machine cycles but less direct labor will show higher costs, while low-technology simple parts will show lower costs under the new system. Having more accurate costs will make ETO more profitable by reducing under- and over-estimating of expenses

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    2K views2 pages

    Seligram Case Questions

    Uploaded by

    Zain Bharwani
    The existing cost system at ETO uses a 145% burden rate that is applied to direct labor costs. This lumps together different overhead costs. The accounting manager proposes a new two-pool system that separates administrative/technical overhead costs, which are applied per direct dollar, from other overhead costs, which are applied per machine hour. This new system will provide more accurate costs by tying specific overhead costs to the underlying cost drivers of either direct labor or machine hours. High-technology products that have long machine cycles but less direct labor will show higher costs, while low-technology simple parts will show lower costs under the new system. Having more accurate costs will make ETO more profitable by reducing under- and over-estimating of expenses

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    © All Rights Reserved
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    of 2

    1.1) Describe ETOs existing cost system.

    ETO's current cost system is a more general cost system. The total cost has
    two components. The first component is the actual direct labor dollars used by a lot.
    The second component is the actual direct labor dollars used by a lot multiplied by a
    burden rate. The burden rate is calculated by dividing the total burden costs by the
    sum of testing and engineering labor dollars and equals 145%. The total cost is the
    sum of the two components.

    1.2) How is the 145% burden rate calculated?
    The 145% burden rate is calculated by the total burden costs divided by the
    sum of testing and engineering labor dollars. The total burden costs include the
    variable burden costs, fixed depreciation and other fixed burden costs.

    1.3) What assumptions does the existing system make regarding overhead
    drivers?
    That the machine hours across different testing is equal so the rate for each
    direct labor dollar is the same.

    1.4) Are these assumptions reasonable?
    No

    1.5) If not, why do they use them?
    They use them because it is simpler. Because all the lots use some sort of
    direct labor so it is a common driver among all the lots.

    2.1) Describe the redesigned system proposed by ETOs accounting manager.
    The account manager proposed a cost system that would trace burden into
    two different pools. The first pool includes admin and tech functions and charges on
    a rate per direct dollar. The second pool includes all other burden costs and charges
    on machine hours.

    2.2) Why will it provide more accurate costs?
    It will provide more accurate costs because it will trace costs depending on if
    the component uses more machine hours or direct labor and cost accordingly.

    3.1) What types of products will show higher reported costs under the
    accounting managers system, relative to the original system?
    The high-technology digital components will show higher reported costs
    under the accounting manager's system because now components will be charged
    on the machine hours used opposed to direct labor dollars. High-technology
    components have longer test cycles but require less direct labor.

    3.2) What types of products will show lower reported costs?
    The low-technology simple parts will show lower reported costs because
    they have low machine hours and labor was already on the decline.
    4.1) Assume the new system does provide more accurate costs. How will this system make ETO
    more profitable? (Note: its not sufficient to just say more accurate costs are better.)
    Accurate costs means there is less under and overestimating so the expenses
    that actually occur are along the lines of the costs that are estimated and allocated.
    This means that expenses are less and profit is more.

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