Siemens Electric Motor Work (A) (Abridged)
Siemens Corporation, one of the world’s largest electrical and electronic products producer, has been in business trouble due competitive environment and high costs. Its largest group, Electric Motor Works (EMW) has been focusing on producing standard as well as customized motors and found out that Siemens has great profitability in producing low volume customized A/C motors. To successful implement this new strategy, not only has EMW renovated the shop floors for process improvement, but also redesigned the components of motors. However, as the strategy implementing, the traditional cost system seemed to be inappropriate. Before, a ...view middle of the document...
The company still needs to maximize profits.
(3) EMW is now running at a theoretical capacity, which is inappropriate for activity-base costing system.
Analysis and Discussion
(1) Costs change under Different allocation system
Table 1-1 and Table 1-2 in appendix1 have shown the costs change in traditional cost system and new cost system. The traditional system assigned DM and DL directly to product and classified overhead costs into two groups: variable (materials related and production related) and non-variable (support related). The old system used single allocation rate for each overhead costs, which did not clearly indicate cost drivers for each group and biased the cost. This is explained by the unchanged average costs in different units of orders in old system (Table 3-1). Since costs drivers could not be identified under old system, the company may suffer loss if its decision was based on this allocation method.
In order to refine the assignment of indirect costs, activity-base costing system should be applied since it identifies individual activities as the fundamental cost objects, calculate costs of individual activities and assign costs to cost objects. As a result, to better trace the variation of costs in support related overhead according to change of product mix, two new cost pools has been added, based on the analysis of activity cost drivers in support related costs. Costs related to order processing are allocated by the processing of orders while those related to special components cost pool driven by different times processed. Under the new system, firstly, as the units increased, the less order processing cost was allocated to each unit, while the number of special components played more important role. The overall costs change over number of orders (Graph(1)) shows that when number of orders has reached 100 or above, costs under new system is less than traditional system, which reflects effect of contribution margin over fix overheads. Same change in every 5 orders is demonstrated in appendix3 and according to different type special components that each order includes, the more special components in each motor, the higher the costs are. Also, since remained unchanged in different order processing cost per order decreases as orders volume increases. Last but not least, the overhead costs calculation in Table2 shows the differences between base motor and special components under two systems. It has correctly reflected the resources input in these two products.
(2) Product Mix Issue and Pricing
According to the study, low volume customized motors are mainly profitable product of EMW. However, as statistics of orders and output in 1987 reported, EMW is still focusing on production of the low-profit standard motors. This is because a substantial portion of orders of custom motors are fewer than 20 while the quantity demand of standard motors is large even though they consist only 10% of the orders. Thus, profit...