There are mainly three factors leading to the failure of the existing system at EOT. 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 KIT delivery. Number of tests being done by EOT reduces because the suppliers did the testing by themselves. Second, there is a shift from simple inspection services to broader-based test technology. Although EOT provides engineering supports on complex parts, outside testing services are even cheaper, SP. N 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 EOT. Charges for testing go up due to an Increase In burden rates.
But for the second method, the one proposed by the accounting manager, penalizes jobs with relatively more main machine hours than mechanical machine hours. The third method, the one proposed by the consultant, is relatively the best among the three as it divides direct labor cost from the machine cost(Main-Test Room and Mechanical Test Room), which makes more sense and more fair, yielding a more accurate estimate. The downside of it, thou, is that this method would increase the total cost As for recommendation, we would suggest the company to allocate their cost according to the real usage of the material.
With the cost being driven by the consumption of the resources, the production capacity is likely to be at it’s fullest as it true cost of a product which would lead to better management decision. Question 3: Under the existing system, whether the manufacturing division of Salesgirl should be required to purchase their testing from EOT depends on the simplicity/ complexity of the inspection services. Since “low technology” outside laboratories is often cheaper, especially on large lots, the division should be required to purchase the testing from outside services.
On the other side, since “complex parts” require sophisticated engineering resources in which EOT has its competitive advantage in doing that. Therefore, EOT could provide cheaper, rapid and cost-effective engineering services, the divisions should purchase their testing from EOT. Moreover, the existing accounting system may benefit these “complex parts” by allocating comparatively low manufacturing overhead of EOT to those complex parts. Under the new cost accounting systems, the divisions should purchase their testing for both low and high technology parts from EOT.
Implementing two- and three- burden-pool systems utilize separate burden centers for accounting could allocate the burden costs based on machine hours and rate per direct labor dollar. Both of the new systems are more reasonable and relevant than the existing one in terms of burden costs on machine and direct labor. Although the allocating cost for the “complex parts” would have a comparatively higher burden of overhead allocation than that of the original accounting system, this higher percentage of allocation would truly reflect their cost of inspection.