Seligram Case Cost Accounting

Was the existing system adequate in the past? Why or why not? Why is it no longer adequate? The existing system was adequate in the past due to heavy reliance on direct labor hours. The ETO served as a central cost center, and transferred the costs to other divisions at direct costs plus allocated burden. Being in the late 1970s and early 1980s, technology testing of components required fewer cycles, and less complicated structures. Hence, such testing on products could be carried out by direct labor. The products included Integrated circuits, capacitor resistors, transistors and similar components. The testing center would handle about 500 components per month, and close to 3,000 per year. In addition, the main components tested were defense related, and hence they had a single client with a large share of the business.
The previous accounting system focused on two variables: direct labor and burden. For the latter, costs were grouped into a single cost pool that included burden costs associated with of the testing rooms i.e. mechanical and electrical; as well as engineering burden costs related to software and tooling development alongside administrative costs of the division. As the case mentions, total burden costs are then divided by the sum of testing and engineer labor dollars to arrive at burden rate per direct labor hour. Furthermore, the division would cost each lot of components, as burden was calculated for each lot from the product of actual direct labor dollars and 145% of the burden rate. In this case, the system is adequate, however it is temporary. Due to the method of calculating the burden rate we saw minor flaws. The formula is hinged on the number of direct labor dollars of testing and engineering. As technology progressed, it is obvious that the number of direct labor will be forced out with new machines. Much like the way auto assembly lines workers were phased out, the same would apply to ETO’s testing and engineering segment. Hence,