Failure of electronic testing operations

ETO was one of the cost systems with two components namely direct labor costs and overhead. This is because the given burden rate was mainly associated with direct labor costs. It applied both systems proportionately on all products used. This was ineffective because some products required direct labor costs while others required automated machinery operations. Bruns (1999) asserts that with the advancement in technologies and new testing methodologies, ETO became obsolete. This decreased the direct labor while the overhead rates increased and thus, overall rates became higher. Another reason that led to the failure of the electronic testing operations was the current shift of the system to JIT and the whole switch to more testing methodologies assumed to be complex. This affected the labor mix mostly. All these factors were trending to the overall higher rates and higher burden rates.

On the other hand, ETO existing system assumed that all the consumed products consumed overhead and direct labor in the same proportion. Even though there were different products that were produced on cheap and simple labor and intensive equipment while other products required expensive automated equipment’s. This led to the whole existing system to fail because when the testing processes became complicated, they required less labor equipment’s and more expensive equipment. This meant that the costs proportions led by the overhead were increasing while the costs proportions led by direct labor were decreasing (Bruns, 1999).

Calculations of the five components as reported by the following computations:

The existing system was computed by an overhead rate of 146%.

Direct labor Overhead Total

ICA $917.00 $1,329.65 $2,246.55

ICB $2,051.00 $2,973.95 $5,024.95

CAPACITOR $1,094.00 $1,586.30 $2,680.30

AMPLIFIER $525.00 $761.25 $1,286.25

DIODE $519.00 $752.55 $1,271.55

(Bruns, 1999)

The system proposed by the accounting manager

(Bruns, 1999)

Direct labor Machine hours Overhead Total

ICA $917.00 $1480.00 $183.40 $2580.40

ICB $2051.00 $3200.00 $410.20 $5661.20

CAPACITOR $1094.00 $600.00 $218.80 $1920.80

AMPLIFIER $525.00 $400.00 $105.00 $1030.00

DIODE $519.00 $960.00 $103.80 $1582.80

The system proposed by the consultant

Machine Hrs Overhead Machine Hrs Rate

Main Test Room 33201 $2,103,116 $63.35

Mech. Test Room 17103 $1,926,263 $112.63

Total 50304 $4,029,379 $80.10

(Bruns, 1999)

Direct labor Main room Mech. room Overhead Total

ICA $917.00 $538.48 $1126.30 $183.40 $2765.18

ICB $2051.00 $886.90 $2928.38 $410.20 $6276.48

CAPACITOR $1094.00 $190.05 $506.84 $218.80 $1559.69

AMPLIFIER $525.00 $253.40 $112.63 $105.00 $996.03

DIODE $519.00 $443.45 $563.15 $103.80 $1629.40

(Bruns, 1999)

The preferable system

The consultant proposed system is most preferable because it tends to put separately costs of the different test rooms. This is important in that we get to know which test room incurs higher costs such as the mechanical room or lower cost such as the main room. The burden rate given above would be common for all the three calculations instead of it being applied on the labor only. Additionally, the consultant proposed system gave the most correct cost information needed by its users. It also enabled the cost system in capturing the various differences in the way the given overheads were consumed in the various stages of the production process.

Recommendations for the preferable system

Mostly, I would particularly recommend that the overhead rate of the system to be constant for all the products not matter variances in direct labor costs. This is because it will assist in giving accurate information needed by its users.

Reference

Bruns, W. (1999). Accounting for managers: text and cases. Illinois: Northwestern University Press.