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In: Business and Management

Submitted By gaurabghosh
Words 503
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What are the main issues in the case?
Siemens’ Electric Motor Works (EMW) made standard electric motors as well as the custom made orders. Initially, standard motors accounted for 80 percent of sales volume, while the remaining 20 percent were customized orders. But as time progressed, EMW could not keep up with the lower labor rates of the Eastern Bloc companies, and they were unable to match up with the prices for the standard electric motors. Due to this reason, there was a shift in strategy and they decided to produce only customized motors. The changes cost them Dm50 million a year for three years to replace almost every machine on the floor and support the new strategy.
But after a couple of years, with the change in the strategy, the traditional cost accounting system started showing signs of trouble. This system assigned material and labor costs directly to the products and divided the overhead costs into three categories – material related, production related and support related. Due to the changes, the orders accepted on an average was for less than five motors and this increased the production support costs and the traditional cost system couldn’t capture the relation between the increased support costs and the change in product mix. This led to inappropriate costing for majority of the products.
How can the issues be addressed?
Under the traditional system, support costs were allocated to each motor based on its consumption of direct materials, direct labor, and either direct labor-hours or machine-hours. Management felt that most support costs were more closely related to the number of orders received or the number of internal factory orders for the customized components required by a specific model of motor.
An analysis of the way work was generated by orders in the shipping and handling, order processing, technical analysis of incoming orders,…...

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