1 Traditional Two-stage Cost System Cost Pool 1: Direct labor hours Products P 1 & P 2 Cost Pool 2: Machine hours Electricity Maintenance Supervision Direct Labor Direct Material $15/kg $10/hr $10/M hr $5/DL hr Engineering
2 Seligram • Focus: • Cost allocation systems • Influence of the cost system on firm strategy • Synopsis: • ETO tests electronic components • No direct material costs • Testing requires increasingly more expensive and less labor intensive equipment
3 Single Cost Pool System • Existing Cost System • Two-stage allocation procedure • Labor dollar is the cost allocation base Overhead Cost pool 4,713k Products Overhead costs Direct labor dollars $4,713k 3,260k = 1.45 100% traced =
4 Single Cost Pool System Product Direct Labor $ Overhead 145% Cost ($) ICA 917 1330 2247 ICB 2051 2974 5025 Capacitor 1094 1586 2680 Amplifier 525 761 1286 Diode 519 753 1272 Cost = Direct Labor + 1.45*Direct Labor What is wrong with the existing system?
5 Single Cost Pool System • What is the major flaw of the current system? • Only one cost pool • Direct labor is the second-stage allocation base • Existent system assumes that all products consume direct labor and overhead in the same proportion • What changes does ETO face? • Direct labor hours per lot decline • Smaller, more frequent lots • Expensive equipment required
6 Single Cost Pool System • Why do these changes make the current system obsolete? • What evidence do we have? • Some products are produced on simple labor intensive equipment • Others require expensive automated equipment product diversity Unlikely that all products consume direct labor and overhead in the same proportion • Why is this a problem?
7 Single Cost Pool System • Products are either over or undercosted Products are either over or underpriced • What types of products will be under- and overcosted by the existing system?
You've reached the end of your free preview.
Want to read all 26 pages?
- Fall '18
- Cost Systems