Seligram, Inc

Case3: Seligram, Inc.

Authors：陈杨思琴41416145，吉俊全41411054，金缄41411056，孟少华41402099

Question 2

According to Exhibit 3 and Exhibit 5, we can get the following rates:

Effective Machine-Hour Rate = $80.00 (two test rooms together)

Effective Burden Rate Per Direct Labor $ = 20%

Effective Machine-Hour Rate of Main Test Room = $63.00

Effective Machine-Hour Rate of Mechanical Test Room = $113.00

Burden Rate Based on the existing accounting system = 145%

Referring to Exhibit 6, we can get the results as the following

(Calculation process is seen in Appendix A. Please note that due to the rounding with different rules, the results can show some small errors with respect to decimals. However, we believe that our calculation process is right.)

Question 4

We think the system proposed by the consultant is best of three since it separates the two testing rooms as different pools and make it more accurate to calculate the cost allocation rate of products with different machine hours in different rooms.

And we also think that the consultant’s recommendation need to be improved in some areas. First, it can be clearly seen from the cost breakdown in Exhibit 5 that although equipment depreciations account for more than 40% of total overheads, the situation in each test room is different. In the mechanical testing room, the total overheads contain depreciation cost of $ 808,103 and other cost of $ 674,327 in which depreciation accounts for 54.51% of total burden costs. However, in the main testing room, the total overheads contain depreciation cost of $ 88,779 and other cost of $ 1,126,958 in which depreciation accounts for only 7.30% of total burden costs. The big difference indicates that the machine hour should not be used as the cost driver in the pool of main testing room. We suggest that direct labor hour is more appropriate to be used in main testing room when calculating the cost allocation rate.

Question 5

We will take the new machine as a separate cost center.

Since the new machine is only needed by few customers. If the main test room burden rate significantly increases when the new machine was included, then we think it is unreasonable to do so. To prove that treating new machine as part of the main test room has made an impact, we calculate the burden rate for the main test room without and with the new machine. The result was shown in the Appendix B and Appendix C.

Appendix B shows the burden rate allocated by machine hours and Appendix C shows the burden rate allocated by direct labor dollars.

As can be seen from the Appendix B, the original burden rate calculated from three-cost-pool system is $63.34. And in the future 8 years, the burden rate with new machine significantly larger than the original one, especially in the first year ($87.14). Although the burden rate decreases with the time pass by, it is still much larger than $63.34 ($70.42 in year8).

For the calculation of burden rate allocated by direct labor dollars (shown in Appendix C), the result is almost same with the previous one. After taking the new machine into consideration, the new burden rate in the Year 1 is 0.798253305 which is obviously larger than the original rate 0.645. Although the difference gradually decreases, new burden rate still 5% larger than the original one.