Background: The Electric Motor Works (EMW) was Siemen’s primary producer of low wattage alternating current (A/C) motors, which sales volume was contributed by 80% of standard motors and 20% of customized motors. Although the firm had started to alter their program and had expanded the business in 1974, they still could not decline the price sufficiently to compete with the lower labour rate in Eastern Bloc competitors. Instead of mass production, EMW changed their strategy to manufacture efficiently various customized motors. As a result, they received 90% of orders were for custom motors whereas standard motors still took around 50% of total annual output in 1987. The firm also identified problems in traditional volume based costing system which could not reflect processing of order and special components accurately. With the new costing system which subtracted activity based cost from support related overhead, the firm could recognise profitable orders and consume resource efficiently.
Problems and Issues: The first problem in 1970s is that EMW could not reduce their cost sufficiently to compete with Eastern Bloc manufacturers. Although Siemens was one of the world’s largest corporation, numerous production facilities had been destroyed in World War II. Their manufacture of electric motors highly depended on EMW. This issue made the firm have difficulty to achieve economic scale and to decline the cost of standard A/C motors. In addition, they stored the standard motors and shipped when orders were received, which warehouse expense might be one of the reasons why they could not decrease the cost. Secondly, the changed product costing systems divided overhead cost into materials, production, and support related overhead. However, there were three different production processes in the new strategy, the components were produced either by machine, or manual, or both. The departmental rate in manufactured overhead was using unsuitable cost driver, and it might...
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