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By:
Bacho Khorava
Giorgi Papuashvili
Salome Kvaratskhelia
Tata Jajanashvili
Vazha Nutsubidze
SHUN ELECTRONICS COMPANY
Table of Contents
Prologue ........................................................................................................................................3
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Prologue
The Shun Electronics Company is a medium-sized, family-owned firm in the Malaysian electronics
industry. The company has two operating divisions. The KB Monitor Division manufactures
computer monitors that are primarily sold to off-brand computer companies. The KL Radio Division
makes two basic radios: a shelf model and a portable model. Each of the two models are available in
three versions: one version was for use in a bathroom shower (a popular option especially in the
American market); another has a 1950’s-style metal cabinet; and the third version has a wooden
cabinet. All six radios were distributed primarily through high-end catalog retailers.
The Assembly department assembles the basic chassis using parts purchased from outside the
For many years the company has been using standard cost system in which a standard product cost
was computed for each of the six radios on divisional bases, divisions were cost pools used to
allocate indirect cost to each type of radio. Budgeted direct material and direct labor costs per radio
are based on standard quantities and hours and expected material costs and labor rates. A standard
overhead cost allocation rate was applied to direct labor plus direct materials in the Assembly
department, and on direct labor alone in the other two departments. The percentage used for the
overhead rate was derived from the expected relationship between budgeted direct labor, direct
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material, and overhead costs, all at an assumed normal production volume. Additional Information
and calculations can be observed on Exhibit 1 in appendices.
Actual costs were collected periodically by the departments for comparison with the standard cost of
work completed in the department. Overhead cost allocation rates usually had to be revised annually,
but the standards for direct labor and direct material costs were changed only when prices, production
methods, or product designs changed significantly. The standard costs were used in the division for a
number of purposes. The cost system produced monthly labor, material, and overhead variances
which were checked by Azraf Tahir to see if any were significantly out of line. Though he kept in
close touch with what was going on in the plant, a variance would occasionally show a deviation over
time that was not easy to spot in daily observations.
Current Changes
The KL Radio Division used a standard cost system in which a standard product cost was
computed for each of the six radios. Budgeted direct material and direct labor costs per radio were
based on standard quantities and hours and expected material costs and labor rates. Actual costs were
collected periodically by the departments for comparison with the standard cost of work completed in
the department.
A standard overhead cost allocation rate was applied to direct labor plus direct materials in the
Assembly department, and on direct labor alone in the other two departments. The percentage used
for the overhead rate was derived from the expected relationship between budgeted direct labor,
direct material, and overhead costs, all at an assumed normal production volume. For example, in the
Assembly department, budgeted overhead equaled 50 percent of budgeted direct labor and direct
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material costs combined. The standard overhead charge for each radio was therefore 50 percent of
the standard direct labor and direct material costs for that radio. Also in the Fabrication and Finished
goods departments budgeted overhead equaled 200% and 100% of direct labor respectively.
Manjit Singh began to consider the existing definition of cost centers. He wondered if the
total product costs would be different if the aggregation of costs was in more detail than just at the
departmental level. Specifically, he wondered if better information could be obtained by using eight
cost centers: the six sections in the Assembly and Fabrication departments and the two areas in the
Finished Goods department. In order to identify the overhead costs incurred within the sections he
asked the department foremen for estimates of the resource costs incurred in each of their various
sections for such items as indirect labor, equipment repair, and supplies. In addition, an examination
of recent invoices helped him verify some of the details the foremen submitted. Exhibit 2 shows the
existing departmental overhead budget and the results of Manjit Singh’s further distribution of those
amounts to the six sections and two areas
With this more detailed identification of costs, and based on dropping direct material costs
as part of the allocation based used in the Assembly department, Manjit recalculated the standard
cost sheets to see if product costs changed. Exhibit 3 shows the results of these calculations
3. Does Manjit Singh’s proposal make him the “bearer of bad news” or a “team player
concerned with the future” of the company?
Manjit Singh was given the task of examining the division’s cost accounting system to see if
the product costs it produced were reasonably accurate. At first glance Manjit seems to be bearer of
bad news because after he had reconstituted the basic cost data, of the six types of radios sold four
showed a higher factory cost that could lead to decreased contribution from these products and
because of that the company could decide to reduce the production of these products.
However, from the other hand, he is a team player concerned with the future of the company because
his investigation of the cost system make it possible for the company to obtain more realistic
information about which products are more profitable than others and increase the firm’s
performance in the future.
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4. How was the Fabrication department’s 200% overhead allocation rate in case
Exhibit 1 derived?
200% of overhead allocation rate in Exhibit 1 comes from the past experience of the company.
The employees who are in charge of measuring the amount of resources needed in production
except of Direct Labor and Direct Materials, look at actual amount of overhead costs during some
observation period. By analyzing the correlation between the DL,DM and OH they assign some,
the most sage percentile to each department. And as a result of past observations workers at Shun
Electronics have found that the fabrication department as a rule required twofold as much
overhead as Direct Labor. That is why 200% is used in allocating overhead costs to six types of
radios produces by the company. See the little abstract fro Exhibit 1.
To fully understand how the number was derived, you need to look at Exhibit 1 and Exhibit 3.
The necessary extracts are here, the additional info can be observed at the end of this report.
Exhibit 1 (Extract)
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Exhibit 2(Extract)
The Section 1 from fabrication Department only incurs costs for production of radios, that are
intended for in-shower use. Thus the in-shower radios use only 5,500$ costs as visible from exhibit
one. That number is divided by total cost allocated to the Section 1 of Fabrication Department, that
amounts 16,000$. As a result you get about 291%, the overhead allocation rate for the Section 1
6. Let’s focus on Exhibit 2 and line items reported there. Would you agree all those are
overhead costs?
If you look at Exhibit 2 you will see that overhead cost list in Assembly Department Include
Supplies, which I think should and must be considered as Direct Material. Also Storage and handling
of material can directly go into the price of materials, like transportation cost is included in materials.
Also it should be noted that most of cost need to have further clarifications in order to decide whether
to include it in direct cost to treat it as overhead.
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Exhibit 1
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Exhibit 2
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Exhibit 3
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