Subject: Managerial Accounting Case 1 Seligram
In the Seligram case, the existing cost accounting system measured two components of cost: direct labor and burden. All burden cost, which is the overhead, was grouped into a single cost pool and was calculated only by using a burden rate per direct labor dollar. This may cause problems since direct labor and overhead are not consumed by the products in the same proportion. Simply using the same burden rate is obsolescent. First of all, direct labor hours per lot tested had been steadily declining, especially with the increase of dependence on vendor certification. This will result in the change of the burden rate. Besides, this system distorts the price to some extent, making the price for complex parts cheaper while price for elementary testing higher compared with price for outside services. What is more, the consequences brought from the introduction of high -technology components would decrease the direct labor hour. All of this was trending to higher burden rates and overall higher rates. Cost allocation based on current burden rate of 145% is calculated within the Exhibit1.
Having noticed of the problems of the existing system, the accounting manager proposed a two-burden-pool method to allocate the burden cost. Under the two-burden-pool method, burden cost has been divided into two pools: one is the burden cost related to the administrative and technical functions and the other is test related burden. The former is calculated based on direct labor dollar, the latter one is calculated by using machine hours. This method takes other factors that cause the burden into account, which makes the cost allocation more accurate than the existing method. The result of two-burden-pool is as the follows.
The consultant proposed a more detailed cost allocation method, i.e. separate burden centers from each of each test room and common technical and administrative...