What Caused the Existing System at Eto to Fail?

1. What caused the existing system at ETO to fail?

The existing system at ETO began to fail because direct labor hours per lot began to decrease due to vendor certification that allows vendors to do the primary testing. In this way, ETO would only be required to test a small sample of each lot for verification purpose. In addition, as ETO increased its engineering support to enhance customer experience, a shift in labor mix from direct to indirect personnel was prompted. However, the existing system with a single cost pool could not provide such detailed information and therefore could not meet the expectation of the management. Another important factor to be considered is that as expensive equipment were introduced for automated tests, direct labors were reduced, creating a gap between a higher depreciation expense and the less direct labor to absorb it. It is common for a cost system to become obsolete when the process experiences increased automation.

2. Calculate the reported costs of the five components described in Exhibit 6 under:

a) The existing cost system

b) The system proposed by the accounting manager

c) The system proposed by the consultant

The cost for the five components described in exhibit 6 can be shown as follows:

a) Using the given burden rate of 145%, the calculated costs of the existing system is shown in Exhibit 1.

b) Using the manager's proposal, the system would be separated by machine hour burden and direct labor burden. The revised labor burden rate would be 21%, while the machine hr burden rate would be $80.1. The relative costs displayed in Exhibit 2.

c) If ETO follows the consultant's recommendation, the main testing room and the mechanical room would be treated as different cost pools. In this way, the reported burden rates are $63.34/hr for the main testing room and $112.23/hr for the mechanical room. The calculations based on the above referenced data are now shown in Exhibit