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SIEMENS ELECTRIC MOTOR WORKSNext class: P6.34, P6.35, P6.38, C6.42, Managing Customer Profitability Midterm is October 22nd (in-class)

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Midterm Date: Friday October 22nd , in-class (75 minutes) Worth: 30% Coverage: Chapters 1-6 Not covered:

Ethical content Journal entries T-accounts Financial Statement prescribed format

Format Short answer questions, similar to in-class and assignment problems/questions Application (60-70%) and discussion (30-40%)

Preparation: Assigned problems (not addressed in class) available on-line Lecture notes available on-line

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Siemens Corporation: Context One of world’s largest producers of

electrical and electronic products – 51B deutschmarks in revenue (50% international sales)

Split into seven major groups and five corporate divisions.

Siemens Electric Motor Works is part of the Manufacturing Industry division of Energy & Automation Group

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Siemens Electric Motor Works: Context EMV emerged pre-1970’s as primary producer of electric

motors 1970’s EMV characterized by a wide range of customers

using an identical motor produced in long runs 1980’s EMV introduced a new strategy of low volume

customized A/C motors. EMV plant was modified to reflect new strategy: large

volume common components were manufactured using equipment and low volume components were processed manually

EMV custom motors required modifications to a standard motor design; 90% of orders were custom orders

Standard Custom Production RunOld Strategy 80% 20% Long New Strategy 10% 90% Short

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Siemens Electric Motor Works: Costing EMV produces 10,000 unique motors that

require 30,000 different special components. EMV had used a product costing system DM and DL directly allocated to products;

overhead allocated in three cost categories 1) material related – based on DM (5.7% of DM) 2) production related – based on DLH (manually

intensive) or MH (automation)(600 cost centers) 3) support related – based on sum of DM, DL,

MOH & POH (35.4%)

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Siemens Electric Motor Works: Costing Problems with traditional costing approach:

inability to capture the relation between increased support costs and the change in product mix

Most support costs were more closely related to the no. of orders received or the no. of internal factory orders for customized components: same resources were required to process an order for 1 motor as an order for 100 (e.g. 74% of orders fewer than 5 motors)

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Siemens Electric Motor Works: Costing Some support costs were allocated to

two new overhead cost pools: 1) Cost related to customer order

processing 2) Costs related to processing orders for

special componentsTraditional 600 cost poolsProkasta 602 cost pools Order Process $13.8M

Special Components $19.5M

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Siemens Electric Motor Works: Costing

Traditional Transferred Process-Oriented

Material ................................................ DM105,000 DM105,000 Material overhead................................. 6,000 6,000 Labor .................................................... 36,000 36,000 Labor or machine overhead ................. 120,000 120,000

Manufacturing cost ............................... 267,000 (74%)* 267,000 (74%)

Engineering costs................................. 12,000 DM(6,300) 5,700 Tooling costs ........................................ 22,500 0 22,500 Administrative costs ............................. 60,000 (27,000) 33,000

Support-related cost*............................ 94,500 (26%) (33,300) (9%) 61,200 (17%)

Customer order-processing.................. 13,800 13,800 Special components processing........... 19,500 19,500 Total cost.............................................. DM361,500 DM 0 DM361,500

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Siemens Electric Motor Works: Costing

A B C D E Cost of Base Motor (before assignments from two new cost pools) ..........................................................................

304.0

304.0

304.0

304.0

304.0

Cost of All Special Components* (before assignments from two new cost pools).....................................................

39.6

79.2

118.8

198.0

396.0

No. of Different Types of Special Components per Motor ... 1 2 3 5 10

Assumptions Base Motor Cost Special

Components Cost Materials................................................................................ 90 12.0 Material overhead.................................................................. 5 0.7 Direct labor............................................................................ 35 4.5 Manufacturing overhead........................................................ 117 15.0 Manufacturing cost ................................................................ 247 32.2 Support-related overhead (modified)..................................... 57 7.4 Unit cost (before assignments from two new cost pools) ...... 304 39.6

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Costing System: Calculations

A B C D ENo. of Different Types of Special Components per Motor

1 2 3 5 10

Cost of Base Motor

Cost of All Special Components

Manuracturing Costs

Support related costs

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Traditional CostingTraditional A B C D E

No. of Different Types of Special Components per Motor

1 2 3 5 10

Cost of Base Motor (before assignments from support related costs

247 247 247 247 247

Cost of All Special Components* (before assignments fof support related)

32.2 64.4 96.6 161 322

Manuracturing Costs 279.2 311.4 343.6 408 569

Support related costs

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Traditional CostingTraditional A B C D E

No. of Different Types of Special Components per Motor

1 2 3 5 10

Cost of Base Motor (before assignments from support related costs

247 247 247 247 247

Cost of All Special Components* (before assignments fof support related)

32.2 64.4 96.6 161 322

Manuracturing Costs 279.2 311.4 343.6 408 569

Support related costs 98.84 110.24 121.63 144.43 201.43

Total Cost 1 378 422 465 552 770 10 378 422 465 552 770 20 378 422 465 552 770

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Prokrasta CostingPROKRASTA A B C D E

No. of Different Types of Special Components per Motor

1 2 3 5 10

Cost of Base Motor (before assignments from two new cost pools)

304 304 304 304 304

Cost of All Special Components* (before assignments from two new cost pools)

39.6 79.2 118.8 198 396

Manuracturing Costs 343.6 383.2 422.8 502 700

Support related costs

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Prokrasta CostingPROKRASTA A B C D E

No. of Different Types of Special Components per Motor

1 2 3 5 10

Cost of Base Motor (before assignments from two new cost pools)

304 304 304 304 304

Cost of All Special Components* (before assignments from two new cost pools)

39.6 79.2 118.8 198 396

Manuracturing Costs 343.6 383.2 422.8 502 700

Support related costs

a) Order Processing 1 210 210 210 210 21010 21 21 21 21 2120 10.5 10.5 10.5 10.5 10.5

b) Special Products 1 60 120 180 300 60010 6 12 18 30 6020 3 6 9 15 30

Total Cost 1 614 713 813 1,012 1,510 10 371 416 462 553 781 20 357 400 442 528 741

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Costing Differences PROKRASTA A B C D E

Total Cost 1 614 713 813 1,012 1,510 10 371 416 462 553 781 20 357 400 442 528 741

Traditional A B C D E1 378 422 465 552 770

10 378 422 465 552 77020 378 422 465 552 770