Seligram Incorporations (Electronic testing operations)

Essay by superucoUniversity, Bachelor'sB+, April 2009

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Cost Management Systems Case Study Seligram 3rd trimester 2008 EM-Lyon






Yao WU

Description of the existing cost system

The existing cost system of ETO is very simple.

ETO stands for a cost center which concerns the entire division. This cost center is divided in two cost components: direct labor and allocated burden.

Direct labor costs for each type of lot are traced directly to the products whereas burden is the only one cost pool.

The burden cost includes costs related to each of the testing rooms, engineering costs and administrative costs. Burden costs are divided by the sum of direct labor which allows us to calculate the burden rate.

Indeed, according to the calculations, the burden rate is equal to: (Total burden $ / Direct labor $) x 100 = ($4,713,982 / 3260,015) x 100 = 145%.

The existing cost system can be represented by the following diagram:


Calculation of burden rate for the existing cost system:

Burden rate

Total burden costs


Total direct labor dollars






Effective rate =


Why does the existing cost system fail?

This system was based on the fact that direct costs and overhead are consumed in the same proportion for all product testing. However, the three following reasons show that it is no longer the case.

Firstly, due to the implementation of the vendor certification and the Just-in-time delivery, some products are already tested and do not need any further tests. There are so not concerned by the allocation of costs and ETO will face a decreasing number of tests.

Then, the firm faces outsourcing, that is to say a movement from direct towards to indirect cost. This new trend leads to a decrease...