Shun Electronics Case Study

...

And direct labor refers to the employees and temporary help who work directly on a manufacturer's products.

In the production of a radio, materials like metal sheets, wooden parts, plastic, chips, screws or electrical circuits can be concluded as direct materials. Direct labor is the labor of workers, electricians or technicians directly working in the production.

A company surely needs cost allocation of direct material and labor cost to a product. Otherwise there would be no difference in the costs of different products made by same direct labor. This would be a fatal mistake in calculation leading to wrong pricing.

- Describe the “old” overhead cost allocation system and describe the key features of the “new” system. Was it just a slow week and Manjit had nothing better to do so he redesigned the cost system or was there something that prompted his redesign?

The old overhead cost allocation system had considered all sections or areas’ working process were the same for different types of models/products. But the overheads changed not only for product but also for the sections.

If the common costs are shared by multiple products, one of the products dominating the overhead might affect other products’ cost.

Below you can find summarizing comparison table of new and old system:

[pic 4]

The changes in overhead calculation percentages in different departments and sections lead to the cost difference:

[pic 5]

Manjit Singh found out a more accurate way of calculating costs after he took a close look at the production steps, processes and defining overhead cost drivers carefully.

- Under the “new” system, what are the overhead cost allocation bases and is this the best choice or not? Has Manjit improved the product costs by his choice of allocation base?

Under the new system direct labor is the overhead cost allocation base. For assembly department, in the old system overhead rate was applied to both direct labor and direct materials. Manjit dropped the direct materials in the new system considering their effect was not as obvious as direct labor’s.

Manjit’s allocation is more logical as he separated overheads based on their use in the sections/areas per the type of the product. This change leaded to a more accurate costing probably will result in better pricing.