# Costs and Machine-hour Rate

Topics: Costs, Cost, Economic cost Pages: 2 (573 words) Published: March 4, 2013
Case: Seligram, Inc.: Electronic Testing Operations 1. What caused the existing system at ETO to fail? Solution: • Less direct labor content and fewer test lots: Direct labor hours per lot had been steadily declined due to an increased dependence on vendor certification, with which the suppliers did the primary testing of components, and hence reduced of the number of tests performed by ETO. There were indications that vendor certification would account for 30% in the next 5 years. Shift from simple inspection services to broader-based technology, which requires a labor mix from direct labor to indirect labor. ETO’s advantage over outside labs is its ability to provide engineering resources on a rapid and cost-effective basis. Very expensive highly automated equipment is required by the introduction of high-technology components. This increase would lead to a smaller allocation base of direct labor to absorb the depreciation costs of the new equipment.

2. Calculate the reported costs of the five components described in Exhibit 6 under: a. The existing cost system Solution: Burden Rate Direct Labor Burden (Burden Rate * Direct Labor) Total costs ICA 145% 917 1329.65 2246.65 ICB 145% 2051 2973.95 5024.95 CAPACITOR 145% 1094 1586.3 2680.3 AMPLIFIER 145% 525 761.25 1286.25 DIODE 145% 519 752.55 1271.55

b. The system proposed by the accounting manager Solution: Direct Labor Admin & Technical (Direct Labor Rate 20%) Other burden costs (Machine-Hour Rate \$80) Total Burden Total costs ICA 917 183.4 80*18.5 =1480 1663.4 2580.4 ICB 2051 410.2 80*40 =3200 3610.2 5661.2 CAPACITOR 1094 218.8 80*7.5 =600 818.8 1912.8 AMPLIFIER 525 105 80*5 =400 505 1030 DIODE 519 103.8 80*12 =960 1063.8 1582.8

c. The system proposed by the consultant Solution: ICA ICB CAPACITOR AMPLIFIER Direct Labor 917 2051 1094 525 Admin & Technical 183.4 410.2 218.8 105 (Direct Labor Rate 20%) Main Room burden costs 63*8.5 63*14 63*3 63*4 (Machine-Hour Rate \$63) =535.5 =882 =189 =252...