Seligram, Inc.: Electronic Testing Operations COMM 354 Fall 2011 Professor Sandra Chamberlain Case Two Analysis
Part A With the existing cost system, there is only one cost driver which is direct labour. The total overhead in the existing cost system is a mix of direct costs and indirect costs. The numbers can be misleading because certain costs such as security, stores/warehousing and holidays/vacations are indirect costs to the cost object which cannot be traced back to specific products or activities. For example, under this cost system, the building depreciation would have to be measured based on direct labour hour. However, companies record depreciation expense under the methods allowed under IFRS or APSE such as straight-line method or double decline method. By doing so, the fixed costs and indirect costs which cannot be traced to direct labour hour increase the numerator which makes the burden rate greater than the one which only has direct costs in the numerator. With the accounting manager’s approach, the company’s able to use two cost drivers to separate machine cost and direct labour cost. By measuring manufacturing costs based on machine hour, ETO would be able to get a more accurate total burden cost. However, from exhibit 6, it is clear to see that the machine hours used in mechanical room is greater than the hours used in main room. By using one single machine-hour rate for
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