There are mainly three factors leading to the failure of the existing system at ETO. First, there has been a steady decline in direct labor hours per lots and fewer test lots. Such a decline is mainly due to an increased dependence on vendor certificate, which is a key component of JIT delivery. Number of tests being done by ETO reduces because the suppliers did the testing by themselves. Second, there is a shift from simple inspection services to broader-based test technology. Although ETO provides engineering supports on complex parts, outside testing services are even cheaper, esp. on large lots when only elementary testing is required. Lastly, the existing testing equipment is getting out-dated and is unable to cope with the pace with new developments in high-technology components. Also, the very expensive highly automated equipment is required to test the new high-technology components. That equipment provides longer test cycles and more test data per part.
Such an increased automation would reduce direct labor needed to absorb depreciation costs for ETO.
Charges for testing go up due to an increase in burden rates. Therefore, ETO notices that the number and frequency of complaints from the customers are amplified.
The Reported Cost of 5 Components under the Existing System
ProductDLBurden=DL*Burden RateAllocated Overhead
@ @ @ @
The Reported Costs of the 5 Components under the System proposed by the Accounting Manager (Two-Cost Pool)
ProductDirect Labor $DL $ RateMachine HourMachine Hour RateAllocated Overhead
IC B 20512461.24032005661.2
Reported costs of the five components described in the system proposed by the consultant
ProductDL DL rate * 0.2Main Test * 63.34Mech. Test * 112.63TOTAL
As for the comparison of...