Hire Writer Three primary reasons will show why the current cost system is no longer adequate for Electronic Testing Operations and that it needs to implement a new cost system to account for the changes that ETO is experiencing.
Currently there are two operating divisionsthe KB Monitor division which manufactures computer monitors, and the KL Radio division which makes radios. For this case, we will be presenting the side from the KL Radio division.
The KL Radio division currently makes two basic radios- a shelf model and a portable model. Altogether there are 6 radios being produced at the company. The current production process can be seen in three departments, assembly, fabrication and finished goods departments.
All three have their own separate functions where the radios are prepped for assembly and testing. Only at the fabrication department is the point where the radios can become separated into their different version and model.
The finished goods department gives a final testing and ships the radios out to their intended locations.
Up to this point, the KL Radio Division uses a standard cost system, which allows for a standard product cost for each of the radios. This cost uses direct materials and direct labour costs per radio that is based on standard qualities, expected material costs, and labour cost.
All costs are assumed at a normal production volume. ISSUE For many years the company has been using standard cost system in which a standard product cost was computed for each of the six radios on divisional bases, divisions were cost pools used to allocate indirect cost to each type of radio.
The budgeted direct material and direct labor costs per radio are based on standard quantities and hours and expected material costs and labor rates, and a standard overhead cost allocation rate is applied. The percentage used for the overhead rate was derived from the expected relationship between budgeted direct labors, direct materials, and overhead costs, all assumed at normal production rate.
Actual costs are collected periodically by the departments for comparison with standard costs of work completed in each of the departments. Overhead costs rates are revised annually but the standard for direct labor and material are only changed when prices, production methods or production designed are changed significantly.
However, an employee of Shun, Manjit, has decided to change the method in which Shun Electronics calculates its costs of its products. Manjit wants to expand the three departmental cost centers to eight, each with its own overhead cost allocation rate.
As a result, it appears that the total costs for four of their six radios will increase, while two will decrease. This poses a great deal of issues concerning Shun Electronics: Continue on with our current cost model 2.
Continue on with our current cost model With our old model, we will be able to continue onwards with our production. However, this poses some serious problems for our product cost.
As we find out, our current new product cost for some radios are higher than the actual amount, therefore, creating a smaller return on investment. At the same time, we must consider that we are not altering our long term decisions, which will be effected by our decisions.
Our current standard costs of radios have changed and we need to address this issue immediately. Our staff members must be able to cope with the short term issues, such as profit margin or return on investment, to long term issues, such as future projections and batch ordering size.
Manjits model demonstrates two key points: Alter Manjits model and compute new numbers Management can see the steps in which Manjit has processed his numbers for the new cost model.
However, we the management, can verify these Related posts:Dec 10, · Seligram Case Study Seligram, Inc. Assignment Questions 1. What caused the existing system at ETO to fail? 2.
Calculate the reported costs of the five components. As described in the case study, components significantly varied in number and type of electrical and mechanical testing required.
For example, some components required six different flows through the facility while others only required electrical testing at room temperature (Seligram p 2). Accounting& Information Management Kanthal Case Study PGPBABI3 - Group 4 • Arnab Majumdar • Kanth.
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ETO Case Study Analysis Seligram Incorporation, Electric Testing Operations (ETO) previously measured two components of cost: direct labor and manufacturing overhead.
The existing cost system is very simple. Burden was grouped into a single cost pool that was combined with each of the testing rooms as well as the engineering burden costs.
Access to case studies expires six months after purchase date. Publication Date: October 12, Explores the obsolescence of a cost system when technology changes.