SIEMENS ELECTRIC

MOTOR WORKS
McGraw-Hill/Irwin

Next class: P6.34, P6.35, P6.38, C6.42, Managing Customer

Profitability
Midterm is October 22nd (in-class)
Copyright 2006, The McGraw-Hill Companies, Inc.

Midterm

Date: Friday October 22nd , in-class (75 minutes)

Worth: 30%
Coverage: Chapters 1-6
Not covered:
Ethical content
Journal entries
T-accounts
Financial Statement prescribed format
Format
Short answer questions, similar to in-class and assignment
problems/questions
Application (60-70%) and discussion (30-40%)
Preparation:
Assigned problems (not addressed in class) available on-line
Lecture notes available on-line

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Copyright 2006, The McGraw-Hill Companies, Inc.

Siemens Corporation: Context

One of worlds largest producers of electrical

and electronic products 51B deutschmarks
in revenue (50% international sales)
Split into seven major groups and five
corporate divisions.
Siemens Electric Motor Works is part of the
Manufacturing Industry division of Energy &
Automation Group

McGraw-Hill/Irwin

Copyright 2006, The McGraw-Hill Companies, Inc.

Siemens Electric Motor Works:

Context

EMV emerged pre-1970s as primary producer of

electric motors
1970s EMV characterized by a wide range of
customers using an identical motor produced in long
runs
1980s EMV introduced a new strategy of low volume
customized A/C motors.
EMV plant was modified to reflect new strategy: large
volume common components were manufactured using
equipment and low volume components were processed
manually
Standard
Custom
Production
EMV custom motors
required
modifications
to a Run
Old
Strategy
20% Long
standard
motor design; 80%
90% of orders
were custom
New
Strategy
10%
90% Short
orders

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Copyright 2006, The McGraw-Hill Companies, Inc.

Siemens Electric Motor Works:

Costing

EMV produces 10,000 unique motors that

require 30,000 different special components.
EMV had used a product costing system
DM and DL directly allocated to products;
overhead allocated in three cost categories
material related based on DM (5.7% of DM)
2) production related based on DLH (manually
intensive) or MH (automation)(600 cost centers)
3) support related based on sum of DM, DL,
MOH & POH (35.4%)
1)

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Copyright 2006, The McGraw-Hill Companies, Inc.

Siemens Electric Motor Works:

Costing

Problems with traditional costing approach:

inability to capture the relation between
increased support costs and the change in
product mix
Most support costs were more closely related
to the no. of orders received or the no. of
internal factory orders for customized
components: same resources were required to
process an order for 1 motor as an order for
100 (e.g. 74% of orders fewer than 5 motors)

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Copyright 2006, The McGraw-Hill Companies, Inc.

Siemens Electric Motor Works:

Costing

Some support costs were allocated to two new

overhead cost pools:
1)

Cost related to customer order processing

2) Costs related to processing orders for special
components
Traditional
Prokasta

McGraw-Hill/Irwin

600 cost pools

602 cost pools

Order Process
Special Components

$13.8M
$19.5M

Copyright 2006, The McGraw-Hill Companies, Inc.

Siemens Electric Motor Works:

Costing
Traditional
Material ................................................
Material overhead.................................
Labor ....................................................
Labor or machine overhead .................

DM105,000
6,000
36,000
120,000

Manufacturing cost ...............................

267,000

Engineering costs.................................
Tooling costs ........................................
Administrative costs .............................

12,000
22,500
60,000

Support-related cost*............................

94,500

Customer order-processing..................
Special components processing...........
Total cost..............................................

McGraw-Hill/Irwin

DM361,500

Transferred

Process-Oriented
DM105,000
6,000
36,000
120,000

(74%)*

267,000
DM(6,300)
0
(27,000)

(26%)

(33,300)
13,800
19,500
DM
0

(74%)

5,700
22,500
33,000
(9%)

61,200

(17%)

13,800
19,500
DM361,500

Copyright 2006, The McGraw-Hill Companies, Inc.

Siemens Electric Motor Works:

Costing
A

Cost of Base Motor (before assignments from two new

cost pools) ..........................................................................

304.0

304.0

304.0

304.0

304.0

Cost of All Special Components* (before assignments

from two new cost pools).....................................................

39.6

79.2

118.8

198.0

396.0

No. of Different Types of Special Components per Motor ...

10

Assumptions
Materials................................................................................
Material overhead..................................................................
Direct labor............................................................................
Manufacturing overhead........................................................
Manufacturing cost ................................................................
Support-related overhead (modified).....................................
Unit cost (before assignments from two new cost pools) ......

McGraw-Hill/Irwin

Base Motor Cost

90
5
35
117
247
57
304

Special
Components Cost
12.0
0.7
4.5
15.0
32.2
7.4
39.6

Copyright 2006, The McGraw-Hill Companies, Inc.

Costing System: Calculations

A
No. of Different Types of Special
Components per Motor
Cost of Base Motor

B
1

C
2

D
3

E
5

10

Cost of All Special Components

Manuracturing Costs
Support related costs

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Copyright 2006, The McGraw-Hill Companies, Inc.

Traditional Costing
Traditional
No. of Different Types of Special
Components per Motor
Cost of Base Motor (before
assignments from support related
costs
Cost of All Special Components*
(before assignments fof support
related)
Manuracturing Costs

10

247

247

247

247

247

32.2

64.4

96.6

161

322

279.2

311.4

343.6

408

569

Support related costs

McGraw-Hill/Irwin

Copyright 2006, The McGraw-Hill Companies, Inc.

Traditional Costing
Traditional
No. of Different Types of Special
Components per Motor
Cost of Base Motor (before
assignments from support related
costs
Cost of All Special Components*
(before assignments fof support
related)
Manuracturing Costs

Support related costs

Total Cost

McGraw-Hill/Irwin

1
10
20

10

247

247

247

247

247

32.2

64.4

96.6

161

322

279.2

311.4

343.6

408

569

98.84

110.24

121.63

144.43

201.43

378
378
378

422
422
422

465
465
465

552
552
552

770
770
770

Copyright 2006, The McGraw-Hill Companies, Inc.

Prokrasta Costing
PROKRASTA
No. of Different Types of Special
Components per Motor
Cost of Base Motor (before
assignments from two new cost
pools)
Cost of All Special Components*
(before assignments from two new
cost pools)
Manuracturing Costs

10

304

304

304

304

304

39.6

79.2

118.8

198

396

343.6

383.2

422.8

502

700

Support related costs

McGraw-Hill/Irwin

Copyright 2006, The McGraw-Hill Companies, Inc.

Prokrasta Costing
PROKRASTA
No. of Different Types of Special
Components per Motor
Cost of Base Motor (before
assignments from two new cost
pools)
Cost of All Special Components*
(before assignments from two new
cost pools)
Manuracturing Costs

10

304

304

304

304

304

39.6

79.2

118.8

198

396

343.6

383.2

422.8

502

700

Support related costs

a) Order Processing

1
10
20

210
21
10.5

210
21
10.5

210
21
10.5

210
21
10.5

210
21
10.5

b) Special Products

1
10
20

60
6
3

120
12
6

180
18
9

300
30
15

600
60
30

Total Cost

1
10
20

McGraw-Hill/Irwin

614
371
357

713
416
400

813
462
442

1,012
553
528

1,510
781
741

Copyright 2006, The McGraw-Hill Companies, Inc.

Costing Differences

PROKRASTA

Total Cost

1
10
20
Traditional

614
371
357
A

1
10
20

McGraw-Hill/Irwin

713
416
400
B

378
378
378

813
462
442
C

422
422
422

465
465
465

1,012
553
528

1,510
781
741

552
552
552

770
770
770

Copyright 2006, The McGraw-Hill Companies, Inc.