Seligram, Inc.: Electronic Testing Operations - Costs of the Five Components

Discussion Questions: Seligram, Inc.: Electronic Testing Operations

Question 2. Calculate costs of the five components described in Exhibit 6 as reported by:

a. Costs of the five components as reported by the existing system:

Burden rate = Total Burden / Direct Labor                

Total Burden = $4,713,982                 

Direct Labor = $3,260,015                 

Burden rate = 144.60%                

Effective rate = 145%, which means gor every dollar of direct labor cost we add $1.45 of overhead.

b. Costs of the five components as reported by the accounting manager:

The division accountant proposes to directly trace burden to two cost pools:

1. Burden related to the administrative and technical functions which is charged on a rate per DL$
2. All other burden costs charged based on machine hours

As per Exhibit 5:

• Effective machine-hour rate = $80
• Effective burden rate per direct labor $ = 20%

c. Costs of the five components as reported by the system proposed by the consultant:

Consultant recommended to implement a three-burden-pool system utilizing separate burden centers for each test room and a common technical and administrative pool. Burden would be directly traced to each of the three burden pools. Burden costs in the test rooms would be allocated on a machine-hour basis. Technical and administrative costs would continue to be charged on a rate per direct labor dollar.

We first find burden rates for each of three profit pools by dividing overhead of each test room to machine hours of that room and divide technical and administrative costs to total direct labor to find third rate.

Then to find overhead of each product, we multiply machine hour rates to working hours of each product and burden rate for technical and administrative costs multiply by direct labor of each product.