Managerial Accounting Case Solution To Seligram, Inc.: Electronic Testing Operations

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Seligram, Inc.: Electronic Testing Operations

Wang Nan (0876 8430)

1. Introduction of ETO

Electronic Testing Operations (ETO), a division and the service sector of Seligram, Inc., provided testing for electronic components such as integrated circuits, transistors, capacitors, transformers, relays, and crystals. Function of testing includes two: Electrical Testing and Mechanical Testing. Based on that, the testing facility was divided into two rooms. The main testing room used for electrical testing and mechanical room for mechanical testing.

2. The Current Cost System: One Cost Pool System

In order to determine the lot's total cost and finally supports the pricing decision of Seligram, this existing accounting system uses one cost pool system. All overhead allocation only bases on direct labor dollar base. To be specific, all overhead is divided by direct labor dollar in order to get the burden rate, and then to calculate each lot's resulting burden cost. Finally, plus actual labor dollar to get the lot's cost. Each lot's cost as follows:

Burden Rate=Total Burden/Direct Labor=$4,712,982/$3,260,015=144.6%

Effective Rate=145%

A) ICA=917+1.45*917=$2,246.65

B) ICB= 2,051+1.45*2,051=$5,024.95

C) CAPACITOR= 1,094+1.45*1,094=$2,680.30

D) AMPLIFIER= 525+1.45*525=$1,286.25

E) DIODE= 519+1.45*519=$1,271.55

Total: $12,509.70

This single cost pool system shows that all the products consume the same direct labor and overhead. However, some products consume more labor and some products require more machine operation rather than simply direct labor. In addition, as the introduction of high-tech components created, the need for automatic testing, equipment intensive products will definitely increase and labor intensive ones will decrease. Therefore, it is impossible that all products consume the equipment and labor in the same percentage now, let alone in the future. It is unwise to just use one cost pool to calculate costs and determine the price.

3. Accounting manager's solution: Two Cost Pools System

In order to solve such issue, the division's manager submitted a proposal, a new accounting cost system: two cost pools. The first pool contains burden related to the administrative and technical functions: charged on a rate per direct labor dollar. The second pool contains all the other burden: charged bases on machine hours. Cost of each lot as follows. That is Direct Labor Dollars Base and Machine Hours Base cost system.

Burden Rate=Engineering + Administrative Burden / Direct Labor Dollars

=$684,603 / 3,260,015 = 21% Effective=20%

Machine Hour Rate= Other Burden / Machine Hours

= $4,029,379 / 50,304 = $80.10 Effective=$80

Each lot's cost as follows:

A) ICA=917+0.2*917+80*18.5=$2,580.40

B) ICB= 2,051+0.2*2,051+80*40=$5,661.20

C) CAPACITOR= 1,094+0.2*1,094+80*7.5=$1,912.80

D) AMPLIFIER=...

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