The existing managerial accounting system at ETO failed because it did not reflect the shifting competitive situation requiring broader test technology. The presentation compares three accounting methods: the existing method, the accounting manager's method, and the consultant's method. The consultant's method is preferable because it is the most accurate in allocating overhead costs between direct labor hours and machine hours for different products. A new machine will be installed, requiring an accounting method that properly incorporates depreciation costs based on machine hours to avoid misstating costs and setting prices incorrectly. Simulations show the new machine will initially increase total costs but reduce labor costs over time.

1. Managerial Accounting
Final Presentation
Seligram, Inc.: Electronic Testing Operations
1

2. Agenda
1. What caused the existing system at ETO to fail?
2. Comparison among three managerial accounting
methods
3. Which system is preferable?
4. Accounting method for new machine
2

3. What caused the existing system at ETO to fail?
 Competitive Situation
A shifting from simple inspection services to broaderbased test technology is required.
3

4. Comparison among three managerial accounting method (1/4)
1 ． Existing Method
Existing Method
Existing Method
Product
Product
ICA
ICA
ICB
ICB
CAPACITOR
CAPACITOR
AMPLIFIER
AMPLIFIER
DIODE
DIODE
Direct Labor $$
Direct Labor
$917.00
$917.00
2,051.00
2,051.00
1,094.00
1,094.00
525.00
525.00
519.00
519.00
-- Machine Hours --- Machine Hours -Main Room
Main Room Mech. Room
Mech. Room
8.5
10.0
8.5
10.0
14.0
26.0
14.0
26.0
3.0
4.5
3.0
4.5
4.0
1.0
4.0
1.0
7.0
5.0
7.0
5.0
1998 Budget
1998 Budget
Direct Labor
Direct Labor
Total Overhead
Total Overhead
Burden Rate
Burden Rate
$3,260,015
$3,260,015
$4,713,982
$4,713,982
145%
145%
Burden $$
Burden
Formula == Direct Labor $ x 145%
Formula Direct Labor $ x 145%
4
=TOH/Direct Labor dollar
=TOH/Direct Labor dollar
Total
Total
18.5
18.5
40.0
40.0
7.5
7.5
5.0
5.0
12.0
12.0
Burden $$
Burden
$1,329.65
$1,329.65
$2,973.95
$2,973.95
$1,586.30
$1,586.30
$761.25
$761.25
$752.55
$752.55
$7,403.70
$7,403.70
Existing
Existing
TOTAL $ $
TOTAL
$2,247
$2,247
$5,025
$5,025
$2,680
$2,680
$1,286
$1,286
$1,272
$1,272
$12,510
$12,510

5. Comparison among three managerial accounting method (2/4)
2 ． Accounting Manager's Method
Accounting Manager's Method
Accounting Manager's Method
Product
Product
ICA
ICA
ICB
ICB
CAPACITOR
CAPACITOR
AMPLIFIER
AMPLIFIER
DIODE
DIODE
Direct Labor $
Direct Labor $
$917.00
$917.00
2,051.00
2,051.00
1,094.00
1,094.00
525.00
525.00
519.00
519.00
1998 Plan (Proposed Rates)
1998 Plan (Proposed Rates)
Rate per Direct Labor $
Rate per Direct Labor $
Machine-Hour Rate
Machine-Hour Rate
Burden $
Burden $
Engineering & Admin Burden (1)
Engineering & Admin Burden (1)
Other Burden Costs (2)
Other Burden Costs (2)
5
Rate
Rate
20%
20%
$80
$80
-- Machine Hours --- Machine Hours -Main Room Mech. Room
Main Room Mech. Room
8.5
10.0
8.5
10.0
14.0
26.0
14.0
26.0
3.0
4.5
3.0
4.5
4.0
1.0
4.0
1.0
7.0
5.0
7.0
5.0
Total
Total
18.5
18.5
40.0
40.0
7.5
7.5
5.0
5.0
12.0
12.0
-- Burden $ --- Burden $ -(1)
(2)
(1)
(2)
$183.40 $1,480.00
$183.40 $1,480.00
$410.20 $3,200.00
$410.20 $3,200.00
$218.80
$600.00
$218.80
$600.00
$105.00
$400.00
$105.00
$400.00
$103.80
$960.00
$103.80
$960.00
Burden Total
Burden Total
Cost Pool $ Direct Lbr $
Machine Hrs
Cost Pool $ Direct Lbr $
Machine Hrs
$684,603
$3,260,015
Engineering & Admin Burden (1)
$684,603
$3,260,015
Engineering & Admin Burden (1)
$4,029,379
50,304 Other Burden Costs (2)
$4,029,379
50,304 Other Burden Costs (2)
$4,713,982
$3,260,015
50,304
$4,713,982
$3,260,015
50,304
Formula = Direct Labor $ x Rate per Direct Labor $
Formula = Direct Labor $ x Rate per Direct Labor $
Formula = Total Machine Hours x Machine-Hour Rate
Formula = Total Machine Hours x Machine-Hour Rate
$1,663.40
$1,663.40
$3,610.20
$3,610.20
$818.80
$818.80
$505.00
$505.00
$1,063.80
$1,063.80
TOTAL $
TOTAL $
$2,580
$2,580
$5,661
$5,661
$1,913
$1,913
$1,030
$1,030
$1,583
$1,583
$12,767
$12,767

6. Comparison among three managerial accounting method (3/4)
3 ． Consultant's Method
Consultant's Method
Consultant's Method
Product
Product
ICA
ICA
ICB
ICB
CAPACITOR
CAPACITOR
AMPLIFIER
AMPLIFIER
DIODE
DIODE
Direct Labor $
Direct Labor $
$917.00
$917.00
2,051.00
2,051.00
1,094.00
1,094.00
525.00
525.00
519.00
519.00
1998 Plan (Proposed Rates)
1998 Plan (Proposed Rates)
Rate/Direct Labor $
Rate/Direct Labor $
Machine-Hour Rate 1
Machine-Hour Rate 1
Machine-Hour Rate 2
Machine-Hour Rate 2
Rate
Rate
20%
20%
$63
$63
$113
$113
Burden $
Burden $
Engineering & Admin Burden (1)
Engineering & Admin Burden (1)
Main Room (2)
Main Room (2)
Main Room (3)
Main Room (3)
6
-- Machine Hours --- Machine Hours -Main Room Mech. Room
Main Room Mech. Room
8.5
10.0
8.5
10.0
14.0
26.0
14.0
26.0
3.0
4.5
3.0
4.5
4.0
1.0
4.0
1.0
7.0
5.0
7.0
5.0
Total
Total
18.5
18.5
40.0
40.0
7.5
7.5
5.0
5.0
12.0
12.0
(1)
(1)
$183.40
$183.40
$410.20
$410.20
$218.80
$218.80
$105.00
$105.00
$103.80
$103.80
-- Burden $ --- Burden $ -(2)
(3)
(2)
(3)
$538.43
$1,126.27
$538.43
$1,126.27
$886.83
$2,928.31
$886.83
$2,928.31
$190.03
$506.82
$190.03
$506.82
$253.38
$112.63
$253.38
$112.63
$443.41
$563.14
$443.41
$563.14
Cost Pool $ Direct Lbr $ Machine Hrs
Cost Pool $ Direct Lbr $ Machine Hrs
$684,603
$3,260,015
Engineering & Admin Burden (1)
$684,603
$3,260,015
Engineering & Admin Burden (1)
$2,103,116
33,201 Main Room (2)
$2,103,116
33,201 Main Room (2)
$1,926,263
17,103 Mech. Room (3)
$1,926,263
17,103 Mech. Room (3)
$4,713,982
$3,260,015
$50,304
$4,713,982
$3,260,015
$50,304
Formula = Direct Labor $ x Rate per Direct Labor $
Formula = Direct Labor $ x Rate per Direct Labor $
Formula = Main Room's Machine Hours x Machine-Hour Rate 1
Formula = Main Room's Machine Hours x Machine-Hour Rate 1
Formula = Mech. Room's Machine Hours x Machine-Hour Rate 2
Formula = Mech. Room's Machine Hours x Machine-Hour Rate 2
Burden Total
Burden Total
$1,848.10
$1,848.10
$4,225.34
$4,225.34
$915.66
$915.66
$471.01
$471.01
$1,110.35
$1,110.35
Three Pools
Three Pools
TOTAL $
TOTAL $
$2,765.10
$2,765.10
$6,276.34
$6,276.34
$2,009.66
$2,009.66
$996.01
$996.01
$1,629.35
$1,629.35
$13,676
$13,676

7. Comparison among three managerial accounting method (4/4)
These graphs show difference between total costs of three types of costing
system for each component. The right graph shows the observation of the ratios
of “Direct labor” and “Machine hours”.
A difference between three systems depends on the balance of direct labor and
machine hours ratio. So when the direct labors ratio is less than machine hours
ratio, Consultant’s method shows the increment of the total cost.
7

8. Which system is preferable? Why?
Comparison among three methods
Product
Direct Labor $
Product
Direct Labor $
ICA
$917.00
ICA
$917.00
ICB
2,051.00
ICB
2,051.00
CAPACITOR
1,094.00
CAPACITOR
1,094.00
AMPLIFIER
525.00
AMPLIFIER
525.00
DIODE
519.00
DIODE
519.00
-- Machine Hours --- Machine Hours -Main Room Mech. Room
Main Room Mech. Room
8.5
10.0
8.5
10.0
14.0
26.0
14.0
26.0
3.0
4.5
3.0
4.5
4.0
1.0
4.0
1.0
7.0
5.0
7.0
5.0
Total
Total
18.5
18.5
40.0
40.0
7.5
7.5
5.0
5.0
12.0
12.0
Total Burden
Total Burden
Three Pools
Two Pools
One Pool
Three Pools
Two Pools
One Pool
$1,848.10 >
$1,663.40 >
$1,329.65
$1,848.10 >
$1,663.40 >
$1,329.65
$4,225.34 >
$3,610.20 >
$2,973.95
$4,225.34 >
$3,610.20 >
$2,973.95
$915.66 >
$818.80 <
$1,586.30
$915.66 >
$818.80 <
$1,586.30
$471.01 <
$505.00 <
$761.25
$471.01 <
$505.00 <
$761.25
$1,110.35 >
$1,063.80 >
$752.55
$1,110.35 >
$1,063.80 >
$752.55
TOTAL $
TOTAL $
Three Pools Two Pools
One Pool
Three Pools Two Pools
One Pool
$2,765.10
2580.4
2246.65
$2,765.10
2580.4
2246.65
$6,276.34
5661.2
5024.95
$6,276.34
5661.2
5024.95
$2,009.66
1912.8
2680.3
$2,009.66
1912.8
2680.3
$996.01
1030
1286.25
$996.01
1030
1286.25
$1,629.35
1582.8
1271.55
$1,629.35
1582.8
1271.55
$13,676
$12,767
$12,510
$13,676
$12,767
$12,510
Consultant’s method is most accurate.
<Reasons>
Existing method does not reflect actual cost, which give a negative impact to
appropriate price setting.
Considering more demand for automation of the testing, the depreciation cost
should be properly incorporated in the cost of goods sold.
8

9. Accounting method for new machine
 Introduction of one more new machine will
increase the depreciation cost. So
if a burden is only calculated based on a
direct labor dollar, the cost of goods sold will not be
properly incorporated.
 Therefore, unless a burden with machine hours ratio
is introduced as cost standard, wrong cost of goods
sold will be set which will lead to wrong price setting
and result in a negative impact to the company’s
profit.
9

10. Total costs simulation for new machine
Considering the increase of machine hours and $500,000 annual
depreciation, total costs for each component by installing new
machine are greater than current system. However future total
costs will decline following by the increase of machine hours
since year 4 .
10

11. Labor costs saving simulation for new machine
A benefit of installing new machine is definitely the reduction of
labor costs by making testing more automated. It is the sensitive
simulation for clarifying how labor costs reduction affects to total
costs. As discussed before, new costing system tends to show
both of increase and decrease, but installing new machine can
contribute from the viewpoint of entire of labor costs reduction.
11

12. Managerial Accounting
Final Presentation ‐ End of File
Goshi Fujimoto (201247529)
Natsuhi Inoue(201247507)
Chie Fukubayashi(201247528)
Tsukasa Mori (201247531)
Kenichi Nakamura(201247525)
12