# Siemens Electric Motor Works (A) Process-Oriented Costing Case Solution

Solution Id Length Case Author Case Publisher
1104 1364 Words (6 Pages) Robin Cooper, Karen H. Wruck Harvard Business School : 189089
This solution includes: A Word File and An Excel File

In order to calculate the total cost of all order types for the old costing system, one needs to add the overhead costs of support related activities to the base costs of the motor and special components. On contrast, for the new costing technique, two additional cost centers need to be established. The overhead rate for the order processing and specialty components are computed to be \$210.29 and \$60 respectively. The unit cost of all order types remains the same for the number of units demanded. The new costing system shows that the unit cost decrease as the number of demanded units increases. The new costing method is very efficient in allowing management to improve decision making.

## Following questions are answered in this case study solution

1. Calculate the cost of the five orders in Exhibit 4 under the traditional and new cost systems.

2. Calculate traditional and revised costs for each order if 1 unit, 10 units, 20 units, or 100 units are ordered. Graph the total product cost (for orders of 1, 10, 20, and 100) against volume ordered, and then repeat for product cost per unit.

3. Does the new cost system support the strategy of the firm in ways that the traditional system cannot? Is Karl-Heinz Lottes overestimating the value of the new cost system? Discuss.

## Case Analysis for Siemens Electric Motor Works (A) Process-Oriented Costing

#### 1. Calculate the cost of the five orders in Exhibit 4 under the traditional and new cost systems.

 Order Type A B C D E Cost \$ 376.92 \$ 420.39 \$ 463.86 \$ 550.80 \$ 768.15

 Order Type A B C D E Cost \$ 613.89 \$ 713.49 \$ 813.09 \$ 1,012.29 \$ 1,510.29

#### 2. Calculate traditional and revised costs for each order if 1 unit, 10 units, 20 units, or 100 units are ordered. Graph the total product cost (for orders of 1, 10, 20, and 100) against volume ordered, and then repeat for product cost per unit.

In the case of the traditional costing system, the overhead is allocated on the basis of 35%. For every order type and for any level of units demanded, the overhead allocation will be the same. Therefore, the total cost of all order types will remain the same regardless of the total amount of units demanded. This also implies that the unit cost across all the order types will also remain the same. The following formula can be used to compute the total cost:

Total Cost for Order Type = (Base cost of Motor and Special Components + Overhead) * Number of Orders

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