MANAGEMENT ACCOUNTING - II

[Document subtitle]

SIEMENS ELECTRIC MOTOR WORKS (A)

PROCESS ORIENTED COSTING

SUBMITTED TO: -
PROF A. KANAGARAJ

SUBMITTED BY: -
ARINDAM SAIN B19128
SHSHANK PANDEY B19169
FURQAN B19136
MALLIKA JAIN B19146
EXECUTIVE SUMMARY
Siemens is forced to change from majorly producing standard motors to
customized motors as it is not able to match the costing of its eastern bloc
competitors where labour wages are quite low. With a shift in its production
strategy, Siemens is also going to adopt a new costing system. As has been
discussed in the case the new costing system called PROKASTA is being
implemented at Siemens. The per unit costing for five motor orders as given in
the case for both traditional and PROKASTA costing system have been studied.
Thus, we can see that the change in costing system from the traditional approach
to the new PROKASTA system is important in evaluating whether to accept or
reject the orders. Hence, Siemens should go forward with the PROKASTA
system.

PROBLEM STATEMENT
As Siemens expanded its program to low volume customized alternating current
motors in small production runs. The old cost system which supported only the
standard motor was not fit for customized motors. In the old cost system, the
direct labour and direct material cost were distributed to the products directly
whereas the overhead costs were of 3 types, such as production, material and
support related overhead. The traditional costing system was not able to capture
the relation between change in product and increased support cost, which were
more related to the received and customized components. As the number of orders
increased and the number of motors decreased per order, the support department’s
work increased exponentially to maintain the inventory, scheduling and for
requisition of items. The objective was to come up with a new costing strategy
that could accommodate the increase in order of custom motors as well as find a
relation between support cost and product mix.
ALTERNATIVES
1. Maintain the status quo - Siemens can continue to use the same traditional
costing system without making any changes.
2. Adapt a new costing system - Siemens can adapt/upgrade to a new costing
system that accommodates the changing dynamics of the firm.

CRITERIA FOR EVALUATION

1) FITNESS FOR PURPOSE - Cost data should be prepared in a manner
applicable to the purpose of its use and specific context
2) COST EFFECTIVENESS – The application of new costing system would
come with the implementation cost and the transition from the traditional
to the new costing system would be an expenditure for the firm.
3) CHALLENGES OVER TIME AND CONSISTENCY – Cost data should
be such that it can be analysed in a manner so that it ensures fewer
challenges over time, both for specific and routine based information.
4) TRANSPARENCY AND AUDITABILITY - The costing system should
be transparent to users and capable of being audited by an external entity.
EVALUTION OF ALTERNATIVES

Evaluating the alternatives based on the criteria determined above

ALTERNATIVE MAINTAIN THE ADAPT A NEW

STATUS QUO COSTING
CRITERIA SYSTEM
FITNESS FOR
LOW HIGH
PURPOSE
COST
LOW HIGH
EFFECTIVENESS
CHALLENGES OVER
TIME AND HIGH LOW
CONSISTENCY
TRANSPARENCY AND
LOW HIGH
AUDITABILITY

SOLUTION
Based on the evaluation criteria and alternatives, we have come to a solution that
Siemens should adapt a new costing system that accommodates the changes in
the production. As the traditional model was not able to accommodate the shift
in expenses and the cost per unit obtained was erroneous.

The new model suggested, PROKASTA Model, transfers support related cost in
two new cost pools, namely, Special Component Cost and Order Processing
Costs. The order processing costs are allocated on the basis of number of orders
and the special component cost based on the number of special components used
by different models.
The costs mentioned below are classified as PROKASTA Costs and the
Manufacturing Costs are classified as Pre-PROKASTA (traditional) Costs

Break up of PROKASTA Overheads:

1. Costs related to Order Processing 1.1. Order Receiving

1.2. Product Costing and Bidding

1.3. Shipping

1.4. Billing

2. Costs related to Special Components

2.1. Technical Examination of Incoming Orders

2.2. Scheduling and Production Control

2.3. Inventory Handling

2.4. Product Costing and Bidding

2.5. Product Development

2.6. Purchasing

2.7. Receiving

Using PROKASTA system, Siemens were able to discard the offers that were
not profitable to them. This system was able to accurately determine the cost per
unit for fulfilling each order. The costs of some typical orders are determined in
Exhibit 1 and Exhibit 2.
 EXHIBIT 1

Traditional Process Oriented

Material 105000000 105000000

Material-related Overhead 6000000 6000000

Labor 36000000 36000000

Production-Related Overhead 120000000 120000000

Manufacturing Cost 267000000 267000000

Engineering Costs 12000000 5700000

Tooling Costs 22500000 22500000

Administrative Costs 60000000 33000000

Support related Costs 94500000 61200000

Order Processing Costs 0 13800000

Special Components Cost 0 19500000

Total Cost 361500000 361500000

 EXHIBIT 2
Table 2.1
PROKASTA System
A B C D E
Cost of base motor 304 304 304 304 304
Cost of special components 39.6 79.2 118.8 198 396
Order processing costs 210.2857 210.2857 210.2857 210.2857 210.2857
Special Component handling 60 120 180 300 600
Total 613.8857 713.4857 813.0857 1012.286 1510.286

Table 2.2
Traditional System
A B C D E
Cost of base motor 247 247 247 247 247
Special component cost 32.2 64.4 96.6 161 322
Pre support mfg. cost 279.2 311.4 343.6 408 569
Support related OH (35%) 97.72 108.99 120.26 142.8 199.15
Total 376.92 420.39 463.86 550.8 768.15

Table 2.3
No. of orders 65625
Order processing cost 13800000
Order processing cost/order 210.2857

Special Components Cost 19500000

No. of times special comp. requisition prepared 325000
Special Components Cost/order 60