This treatment of support related overheads was unable to adequately capture the relationship between increased support costs and the change in product mix. In order to cater for a wider range of applications, SEMW produced a wide range of customised motors with power ratings from 0.
This reduced costs associated with holding components in inventory, including handling and storage costs as well as the opportunity cost of unused inventory.
The move to smaller orders of highly customised motors led to increase in the number of orders, each of which had roughly similar support related costs regardless of how many motors in an order.
This was because each special component was manufactured on an as required basis. The new cost system helped management decide which custom orders to take by providing more accurate information on which products were cost effective.
This lead to the use of different cost pools, one for each machine class. Each custom motor was modified using a range of custom components to meet the specific requirements for low volume orders. By the s labour costs were a major competitive advantage for Eastern Bloc manufacturers.
Due to strong economic recovery in West Germany during the late s and the s, input costs, includingwages, increased.
Thus, it was necessary to come up with the actual cost to find ways to reduce it, otherwise the company could be in loss or break-even.
Therefore, a new process oriented costing system called PROKASTA was applied to the company, in which two new overhead costs are identified and separated out from support-related cost: Support related overheads were allocated based on the total pre-support related manufacturing costs.
In addition, flexible manufacturing was utilised, with some components having up to 10, custom variations. This affected the manufacture process due to a higher proportion of low-volume components being required for production compared to standard motors. The strategy did not work, as some problems appeared in traditional costing system, where it could not capture the relation between the increased support costs, and the change in product mix.
In order to better understand the cost structures of the new production environment, a process-oriented cost system was introduced by management. Proper costing system gives the proper cost of product manufactured; otherwise unknowingly company is on loss, or break-even.
The Eastern European post-war experience had been very different, with wages and salaries, and standard of living, falling well behind that of West Germany.
In order to produce a much wider variety of motor types in small runs required, Siemens invested DM50 million each year from to to retool, replacing the majority of machines.Siemens Electric Motor Works - 2 produce small-volume specialty components.
While a normal annual production volume for common components might beunits, a single component could have up to 10, custom variations that might have to be produced one at a time.1/5(2).
Siemens is also considered policy to transfer products between sales and production units. Transfer pricing based on standard costs derived from their value system.
The case is unique in that the organizational relationship between the value of the product and the system of transfer pricing study.
Siemens Electric Motor Works (B): Pricing Interdivisional Sales Examines Siemens' insurance policy for prices items moved between your manufacturing and purchasers divisions of the Motor Unit Works, where both of them are profit centers.
Siemens Electric Motor Works’ strategic reorientation in the early s toward production of custom electric motors is a classic case study in process costing. Broadly, it demonstrated the importance of appropriate costing methodology in ensuring managers are using accurate information to make production decisions.
Eric Diep ED Siemens Electric Motor Works Siemens operated as one of the largest corporations on the planet serving as a titan in the electrical production industry. Energy and automation served as the bread and butter for the company’s revenue with low wattage alternating current motors produced at the Electric Motor Works factory.
Siemens Electric Motor Works (A): Process-Oriented Costing Case Solution, Explore how a system cost can help support a company's decision to change strategy.
In the process, students are introduced to a system cost for the simple.Download