Siemens Case Report

Executive Summary

    Siemens Corporation is one of the world’s largest corporations, and is a producer of electrical and electronic products. In the year 1987, Siemens’s revenue was 51 billion deutschmarks.

    The corporation was formed by seven major groups and five divisions. The focus of this case study is Electric Motor Works (EMW), which was the primary factory of Siemens since the 1970s. A change of strategy in 1987 helped EMW become a profitable producer of low volume customized A/C motors.

After the change of strategy, the proportion of custom motors significantly increased from 20% of orders to 90%. Also, the manufacturing efficiency and capacity usage had been improved. A lot of equipment was replaced by automated equipment in order to manufacture common parts at a large volume. Meanwhile, low volume special parts largely depend on a manual production process. This means that processing common parts and special parts require different costs Therefore, the traditional costing system could no longer properly account for the overhead costs.

A new costing system as introduced to solve the problem. With two new cost pools, Order Processing Cost and Special Components Cost, support related costs could be allocated according to the amount of orders. According to the analysis in this report, the new costing system could show the changing cost per unit in relation to the amount of orders. It corresponds with common sense that an increase in products sold results in a smaller cost per unit. As a result, the new costing system can be helpful in building up marketing strategies to encourage large volume orders. For example, providing discounts or free-delivery services on larger orders. Mr. Karl-Heinz Lottes didn’t over-estimate the positive impact of the new costing system.

Case Report

Traditional Costing System

In 1987, the total costs were still calculated directly by using assigned cost pools. They are basically two parts—manufacturing costs and supported related costs. The support related overhead is not the same as support related costs. That is why to calculate the total costs by using the traditional system. The total supported related costs should be 35% multiplied by manufacturing costs, as indicated on page 3.

A, B, C, D, E orders require one base motor and one or several special components. In the traditional system, the calculation is simply multiplying the cost of base motor or special components. The detailed calculation is shown in Exhibit 2. Simply copy the same worksheet and change the number of units, and we can get costs for those five orders with 1, 10, 20, and, 100 units.