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 managers 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 consultants 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 3. 3. Which system do you prefer? Why? Among the above cost accounting systems, I prefer the one that was proposed by the consultant. The reason is that through three-burden-pool cost system, the managers in the company could trace the cost down to more detailed level and understand more about the current situation. As a result, better decisions could be made accordingly. In this case, as we learned that the test procedures vary with components provided by the customers. The pricing policy under the existing system caused increased complaints

from the customers. However, such problem could not be resolved by the management because no detailed information was available for a more appropriate method of pricing.

4. Would you recommend any changes to the system you prefer? Why? Yes, I would. The three-cost-pool system can still be further improved by introducing another cost pool that would cover the engineering support costs. One of the factor that causes the existing system to fail is that the cost information provided could not reflect the increased engineering support costs and therefore is considered ineffective in supporting the managements decisions. However, both the systems proposed by the manager and the consultant grouped the support cost and the administrative cost into the same cost pool. Thus, for a better traceability of different cost to different activities, I would consider the single cost pool for engineering support expense is a necessary improvement on the three-cost-pool system.

Exhibit 1 Direct labor and machine hours (under existing system)

Exhibit 2 Direct labor and machine hours (suggested by manager)

Exhibit 3 Direct labor and machine hours (suggested by consultant)