Costs and Direct Labor

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1.What is the competitive environment of ETO?

ETO, Electronic Testing Operations, provides centralized testing for electronic components such as integrated circuits. Because low-technology outside laboratories were often cheaper, expecially on larger lots, due to no engineering part, ETO has to shift from simple inspection services to more technically sophisticated services.

2.Describe the existing cost system and calculate the cost of the 5 components in the case. What is wrong with the existing cost system?

The existing cost system measures direct labour and overhead. Overhead is grouped into a single cost pool that includes overhead costs associated with each of the testing rooms as well as the engineering overhead costs relating to software and tooling development and the administrative costs of the division.

ETO suppliers started to do the primarily testing themselves and send the components to ETO for more difficult and more expensive tests. The lot sizes decreased and the number of lots increased. In ETO's workload work shifted from simple inspection services to broader based tests. This was because the division was considerably cheaper in these complex tests than the other companies offering this service, for elementary testing however the division was much more expensive. This is a strong indication that the present cost accounting system is not entirely correct. It probably underestimated the costs for complex testing while it overestimated the cost for simple elementary tests. The introduction of high-tech components required very expensive highly automated equipment and this increased the need for a new cost accounting system.

3.Describe the cost system proposed by the accounting manager and calculate the cost of the 5 components in the case.

The cost system of the accounting manager divides the overhead into two cost pools. The first pool contains overhead related to the administrative and technical functions and is charged...
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