Seligram - Q1 Seligram is using a single pool cost system In the single cost pool system all products consume direct labor and overhead in the same

Seligram - Q1 Seligram is using a single pool cost system...

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Exhibit-1 Electronic Testing Operations- 1988 budgeted expenses Amount in $ Direct labour 3,260,015 Overhead Indirect labour 18.23% 859,242 Salary expense 8.36% 394,211 Supplies and expense 11.41% 538,029 5.20% 245,226 4.86% 229,140 51.93% 2,448,134 4,713,982 Total overhead Total budgeted expenses 7,973,997 Depreciation included in service allocations Exhibit-3 Electronic Testing Operations- Calculation of burden rate based on 1988 plan Burden rate = Total burden $ / Direct labour $ X 100 = $4,713,982 / 3,260,015 X 100 = 144.6% 144.6% Effective rate = 145% FIXED Burden for Mechanical Test Room: $1,926,263 / 17,103 = $112.63 Cost breakdown: VARIABLE Depreciation Other Total Total burden 1,426,317 1,288,000 1,999,665 4,713,982 30.26% 27.32% 42.42% Exhibit-5 Electronic Testing Operations- Proposed burden rates based on 1988 plan a) Machine hour rate MH Burden in $ Main test room 33,201 2,103,116 Mechanical test room 17,103 1,926,263 50,304 80.1006 4,029,379 Machine hour rate = Test room burden $ / Machine hour = $ 4,029,379/50,304 = $80.10 Effective machine hour rate = $80.00 b) Direct labour hour rate Total engineering and administrative burden $ = $684,603 Total direct labour dollars = $3,260,015 Burden rate = Engr. & Admin. Burden $ / DLHs X 100 $684,603 / $3,260,015 X 100 = 21% Effective burden rate per direct labour $ =20% FIXED Cost breakdown: VARIABLE Depreciation Other Total Main test room 887,379 88,779 1,126,958 2,103,116 Mechanical test room 443,833 808,103 674,327 1,926,263 Test room burden 1,331,212 896,882 1,801,285 4,029,379 Engineerin & Admin 95,105 391,118 198,380 684,603 Total burden 1,426,317 1,288,000 1,999,665 4,713,982 Exhibit 6 Electronic Testing Operations-Direct labour and machine hour requirements Machine hours Product Direct labour $ Main room Mech. Room Total ICA 917 8.5 10 18.5 ICB 2051 14 26 40 Capacitor 1094 3 4.5 7.5 Amplifier 525 4 1 5 Diode 519 7 5 12 Exhibit-6 Electronic Testing Operations-New testing equipment economics and operating characteristics Cost $2million Useful life 8 years Depreciation method Double declining method Location Main test room Utilisation 10% first year, rising to 60% by third year and in all subsequent years based on 4,000 hours per year availability (2shifts X 2000 hours) Direct labour requirements Approximately five minutes per hour of operation: average labour rate of $30 per hour Engineering requirements: $75,000 Installation and programming costs in first year Estimated overhead $250,000 (variable $1,00,000 and fixed $150,000) (nonengineering depreciation) Q1) Seligram is using a single pool cost system. In the single cost pool system, all products consume direct labor and overhead in the same proportion. The problem with this is that some products need more direct labor while others require more automated machinery operation. Therefore, the proportion of direct labor used to the proportion of direct machining used for each component differs, while they are all being charged at the same rate. The shift in the industry from labor intensive testing to more technologically advanced machine based testing and reliance on vendor certifications caused the single pool cost system to become obsolete. Continuing to use the original cost system would drive the prices charged to customers up to a point where Seligram feared they would lose business.
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