Examples of the problems-
Siemens Electric Motor Works
• 1970’s 200 types of standard motor
• 230,000 motors made per year
• Competition from E. Europe - couldn’t compete
• Changed strategy to make more expensive customized motors • After 2 years still losses and clear that costs were wrong • Action taken to study cost behaviors of EMW
Results of study:
2 new costs pools and remainder of overhead costs in single cost pool New cost pools and allocation:
Cost pool Allocation base i order processing costs shop floor orders
ii special component number of special costs orders • Effects:
• orders with more special parts had higher costs
• orders with small runs had higher costs
Siemens Electric Motor Works EMW (A) Process Oriented Costing 1. Illustrate use of product costing to support strategy.
2. Introduces simple ABC concepts.
1. What competitive conditions did EMW face in late 70’s? • Eastern bloc has insurmountable labor cost advantage • EMW could be forced out of commodity market
• EMW chooses “custom” motor strategy
2. What changed because of the new custom motor strategy? • Production process became more complex
• Production technology more high tech
• Volume and number products up dramatically
3. How did production change?
1970’s 1987 • 200 motor types
• High volume orders, Large batches for Inventory;
• 20% have minor customization.
• 10,000 unique motors
• low volume custom orders dominant, are hand crafted
• FMS for large orders of standard motors
4. Was the strategy successful?
• EMW is still in business
• Emw’s product mix has shifted
• Siemens continues investments in EMW
5. What is Product Mix?
Has EMW adopted new strategy? (EX 1)
• Low vol. orders-
• 74% (...
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