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Seligram

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Seligram * They need to figure out the pricing to cover the cost * Get demand from customer, then complete the task * Customer decided the product mix * Now only one single pool, direct labor as cost driver, no longer accurate * We want to add cost pool and cost driver
1. allocate indirect cost to cost pools
2. use cost driver to allocate cost to product
1. allocate indirect cost to cost pools
2. use cost driver to allocate cost to product

Overview: * ETO tests electronic components * No direct material costs * Requires more expensive and less labor intensive equipment
Now they are using single cost pool:
For every dollar you spent on direct labor, you allocate 1.45 dollar to overhead
For every dollar you spent on direct labor, you allocate 1.45 dollar to overhead

We at first assumed direct labor is proportional to machine hour. Therefore even direct labor goes down, machine hour goes down as well. However, we know some process needs more machine hour.

Major flaw of the current system: * Only one cost pool * Direct labor is second stage allocation base * Existent system assumed that all products consume direct labor and overhead in the same proportion
What changes does ETO face? * More automated, less labor needed * More complicated testing * Smaller and more frequent lots * Require more expensive equipment * Product diversity: some require the expensive equipment while others don’t
Products are either over or undercosted
Products are either over or underpriced

demand moves toward less labor demand moves toward more complex testing
The current cost system also causes the misunderstanding that: * Capital intensive procedure look favorable * Labor intensive procedures look unfavorable
How to improve the cost system: * Add cost pool * Add cost driver
Overhead is

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