You are on page 1of 2

1.1) Describe ETO’s existing cost system.

ETO's current cost system is a more general cost system. The total cost has
two components. The first component is the actual direct labor dollars used by a lot.
The second component is the actual direct labor dollars used by a lot multiplied by a
burden rate. The burden rate is calculated by dividing the total burden costs by the
sum of testing and engineering labor dollars and equals 145%. The total cost is the
sum of the two components.

1.2) How is the 145% burden rate calculated?
The 145% burden rate is calculated by the total burden costs divided by the
sum of testing and engineering labor dollars. The total burden costs include the
variable burden costs, fixed depreciation and other fixed burden costs.

1.3) What assumptions does the existing system make regarding overhead
drivers?
That the machine hours across different testing is equal so the rate for each
direct labor dollar is the same.

1.4) Are these assumptions reasonable?
No

1.5) If not, why do they use them?
They use them because it is simpler. Because all the lots use some sort of
direct labor so it is a common driver among all the lots.

2.1) Describe the redesigned system proposed by ETO’s accounting manager.
The account manager proposed a cost system that would trace burden into
two different pools. The first pool includes admin and tech functions and charges on
a rate per direct dollar. The second pool includes all other burden costs and charges
on machine hours.

2.2) Why will it provide more accurate costs?
It will provide more accurate costs because it will trace costs depending on if
the component uses more machine hours or direct labor and cost accordingly.

3.1) What types of products will show higher reported costs under the
accounting manager’s system, relative to the original system?
The high-technology digital components will show higher reported costs
under the accounting manager's system because now components will be charged
on the machine hours used opposed to direct labor dollars. High-technology
components have longer test cycles but require less direct labor.

3.2) What types of products will show lower reported costs?
The low-technology simple parts will show lower reported costs because
they have low machine hours and labor was already on the decline.
4.1) Assume the new system does provide more accurate costs. How will this system make ETO
more profitable? (Note: it’s not sufficient to just say “more accurate costs are better.)
Accurate costs means there is less under and overestimating so the expenses
that actually occur are along the lines of the costs that are estimated and allocated.
This means that expenses are less and profit is more.