Seligram, Inc. Case Write-Up.pdf - Seligram Inc Case...

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Unformatted text preview: 1/31/2019 Seligram, Inc. Case Write-Up - Google Docs Case Write Up 2 Amber Bramucci, Abigail Clayborne, Ruihan Geng, Cindy Gu Seligram, Inc. 1. Calculate the costs of the five components described in Exhibit 6 as reported by: a. The existing system b. The system proposed by the accounting manager c. The system proposed by the consultant 2. Would you recommend any changes to the system you prefer? Why? The system proposed by the consultant will definitely help alleviate the allocation of product cost. However, the system could be improved by adding another cost pool that is strictly for the engineering costs. The amount of support that engineers provide is more than likely dependent on the type of machine and complexity of the process required to make a product. For this reason, the engineering costs should not be split evenly as per 1/3 1/31/2019 Seligram, Inc. Case Write-Up - Google Docs the consultant’s suggestion of lumping it into pool 1 with administrative and technical burden. The allocation base would be a specialized machine use measure. This will help as direct labor hours reduce and the implementation of “next generation equipment” is rolled out (Cooper et al., 2010). 3. Would you treat the new machine as a separate cost center or as part of the main test room? Explain. Year Variable Depreciation Other Total New Cost New Machine Hours Burden Rate=Machine Cost/ Machine Hr 1 $100,000 $500,000 $225,000 $825,000 400 $2,062.50 2 100,000 375,000 150,000 625,000 1,400 446.43 3 100,000 281,250 150,000 531,250 2,400 221.35 4 100,000 210,000 150,000 460,000 2,400 191.67 5 100,000 160,000 150,000 410,000 2,400 170.83 6 100,000 160,000 150,000 410,000 2,400 170.83 7 100,000 160,000 150,000 410,000 2,400 170.83 8 100,000 153,750 150,000 403,750 2,400 168.23 OH The table above shows that during the first year of using a separate cost center, the burden rate is very high due to low utilization, first­year installation costs, and higher depreciation expense (from using the double declining balance method), which creates a lower allocation basis and higher costs. However, in subsequent years, the burden rate declines as depreciation expenses become smaller and the utilization rises, thereby increasing the allocation base and lowering the costs. Main Test Room Year Variable Depreci Other OH ation 1 $100,000 $500,000 2 100,000 375,000 Total New Cost Total Cost New Machi ne Hours Existin g Machi ne Hours Total Mach ine Hours Burd en Rate/ Hr $225,000 $825,000 $2,103,116 $2,928,116 400 33,201 33,601 $87.14 150,000 2,728,116 1,400 33,201 34,601 78.85 625,000 Total Existing Cost 2,103,116 2/3 1/31/2019 Seligram, Inc. Case Write-Up - Google Docs 3 100,000 281,250 150,000 531,250 2,103,116 2,634,366 2,400 33,201 35,601 74.00 4 100,000 210,000 150,000 460,000 2,103,116 2,563,116 2,400 33,201 35,601 72.00 5 100,000 160,000 150,000 410,000 2,103,116 2,513,116 2,400 33,201 35,601 70.59 6 100,000 160,000 150,000 410,000 2,103,116 2,513,116 2,400 33,201 35,601 70.59 7 100,000 160,000 150,000 410,000 2,103,116 2,513,116 2,400 33,201 35,601 70.59 8 100,000 153,750 150,000 403,750 2,103,116 2,506,866 2,400 33,201 35,601 70.42 The table above shows the burden costs calculated each year under the condition that the new machine is added to the main test room. The first year’s burden rate is significantly lower than that of the separate cost center, but the change in yearly burden rate decreases slower than that of the separate cost center. This is because this scenario deals with much larger numbers, therefore the change in the total cost/allocation base under this scenario will affect the burden rate significantly less than that of the separate cost center scenario. Decision: If the new machine were incorporated into the main test room, the burden rate would be lower than that of the separate cost center due to the much higher allocation base (33,201 machine hours plus the additional hours from the new machine). Therefore, if evaluating in terms of accounting cost, treating the machine as part of the main room seems like a better idea. However, in the long run, integrating the new machine with older equipment fails to isolate and demonstrate the technological effect of the newer machine. Consumers who then use the old machine may switch to places with more advanced technology for testing, in which case ETO will experience lowered demand for their services. 3/3 ...
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