Session 3 Seligram.ppt - Traditional Two-stage Cost System Supervision Maintenance Cost Pool 1 Direct labor hours Electricity Cost Pool 2 Machine hours

Session 3 Seligram.ppt - Traditional Two-stage Cost System...

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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
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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
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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 =
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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?
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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
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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?
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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?
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  • Fall '18
  • Cost Systems

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