Shweta Kale Section - B 2019PGP401 Siemens Electric Motor Works

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The key takeaways are that the old costing system used flat rate costing which led to undercosting, while the new system more accurately allocates overhead costs based on special component and order processing costs.

Under the new system the costs per unit ranged from Rs. 324.5 to Rs. 590, while under the old system the costs ranged from Rs. 264 to Rs. 529.5 per unit.

Under the old system the costs remained flat even as the number of units and product mix varied, while under the new system the costs varied based on the special components and order size.

Shweta Kale

Section - B

2019PGP401

Siemens Electric Motor Works

a. What are the reported costs of five orders under a new system per unit? What are the reported
expenses of five rules under the Old System per unit? Why are the costs per unit different under
those systems?

A B C D E
Cost of base motor 295 295 295 295 295
Cost of all special 29.5 59 88.5 147.5 295
components
Number of different type of 1 2 3 5 10
special
components

Number of motors 1 1 1 1 1
ordered

Cost of Base Motor

Material 90
Material OH 5
Direct Labor 35
Manufacturing OH 110
Cost of Base Motor 240
Pre-Prokasta support related 55
overhead
Pre-Prokasta 295
Cost of special Components

Material 9
Material OH 0.5
Direct Labor 3.5
Manufacturing OH 11.0
Cost Of special Components 24.0
Pre-Prokasta support related 5.5
overhead
Pre-Prokasta 29.5

Traditional Method

A(1) B(2) C(3) D(4) E(5)


Cost of Base 240 240 240 240 240
Motor
Cost of 24 53.5 83 142 289.5
special
components

MFG Cost 264 293.5 323 382 529.5


Support (0.35*MFG 92.4 102.72 113.05 133.7 185.32
related cost Cost)

Total cost 1 Unit 356.4 396.22 436.05 515.7 714.82


5 Unit 356.4 396.22 436.05 515.7 714.82
10 Unit 356.4 396.22 436.05 515.7 714.82

ProKasta Costing

A(1) B(2) C(3) D(5) E(10)


Cost of Base 295 295 295 295 295
Motor
Cost of 29.5 59 88.5 147.5 295
special
Components

MFG Cost 324.5 354 383.5 442.5 590


Cost Amt Rate
Special 19500 325000 60
Component
Order 13800 65625 210.29
Processing

Order Processing costs

1 210.29 210.29 210.29 210.29 210.29


5 10.51 10.51 10.51 10.51 10.51
10 21.02 21.02 21.02 21.02 21.02

Special Products

1 60 120 180 300 600


5 3 6 9 15 30
10 6 12 18 30 60

Total cost

1 594.79 684.29 773.79 952.79 1400.29


5 338.01 370.51 403.01 468.01 630.52
10 351.53 387.03 422.53 493.53 671.03

Difference in cost
Cost in Prokasta minus Traditional method

1 238.39 288 337.74 437.09 685.465


5 -18.39 -25 -33 -47.69 -84.3
10 -4.87 -9.19 -13.52 -22.17 -43.79

• Old system included flat rate costing which led to costs being flat even though the
ordered number of units varied
• It failed to find relationship between change in mix of products and the increased
support costs
• In the old system processing costs were buried under supporting costs and there was
a clear case of under costing
• In new system support cost is driven by special component cost and order processing
cost and minimizes the cost by allocating overhead burden on motors overall. This
method more accurately demonstrates the actual cost of each order.

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