Shun Electronics Case Study

Middle East Technical University

Department of Business Administration

“Shun Electronics” Case

A report based on defined questions

Student: Ayşe Nilay Özkan, 1043405

Course: EMBA 5402 Accounting for Business Decisions - Managerial

Professor: Dr. Naz Sayarı

Date: 04.02.2017

1. Where did the figures in Exhibits 1, 2, and 3 come from and how were they computed?

Exhibit 1 was done before Manjit Singh, the assistant controller, worked on costs detailly. Since the standard costing method was used to form Exhibit 1, it is assumed that all types of portable and shelf radios are made the same way in the departments. Costs are allocated in the departmental level without taking account of activities done. Overhead is calculated as 50% of total direct labor and direct material for both kinds of radios in assembly department, 200% of direct labor in fabrication department and 100% of direct labor in finished goods department. Those percentages are the estimations derived from the calculations of previously experienced productions. For assembly department, the costs are allocated between portable and shelf models, for fabrication department products are divided in to six groups and for fabrication department, again portable and shelf models are taken into consideration.  The management might be said to have considered a bit of the process; for example, they might have thought all kinds of one model (portable or shelf) needed same amount of material or labor in the finished goods department. That is why the cost is allocated between two models, portable and shelf, not between all six groups of products.

To fully understand the production process of Shun Electronics’ radios, the schema below might help before examining Exhibit 2:

[pic 1]

As seen in the schema department’s sections work in different ways for the needed job. In assembly department, there is a continuous flow while the sections of the fabrication department only do the job of a specific product. For finished goods department, not all the sources are allocated for KL radios, also for another division of Shun Electronics, KB Monitor Division.

Manjit Singh wanted to allocate overhead costs per activity. Exhibit 2 is the detailed overhead budget distributed between six sections and two areas of three departments. With the help of foreman, he managed to reach more accurate costs. Exhibit 2 is the first step to reach overall activity based cost calculation shown in Exhibit 3.

After the calculations in Exhibit 2, Manjit Singh reached new overhead rates. He found out different percentages to calculate the sectional or areal overheads. He applied redistributed overhead costs to the former sheet done in Exhibit 1 to have better accuracy. Here is the overhead rate table:

[pic 2]

1. To date, the shelf shower radio was thought to cost M$61.00. Manjit Singh says it’s more accurately determined cost is M$67.56. Why the difference?

Since the calculation of overheads had changed, the difference occurred. The detailed costs shown in Exhibit 2 lead to the new calculation of overheads per sections or per areas. In new system, overhead allocation is based on direct labor only, it used to be both direct labor and material before. To produce Shelf Shower radio only section 1 of Fabrication Department works. This also has effect in the calculation of the difference. [pic 3]

1. What is meant by direct materials and direct labor? In the production of a radio, what direct materials and direct labor might be involved? Does a company need a cost allocation system for assigning direct material and direct labor costs to a product?

According to http://www.accountingcoach.com ; “Direct materials are the traceable matter used in manufacturing a product. The direct materials for a manufacturer of dessert products will include flour, sugar, eggs, milk, vegetable oil, spices, and other ingredients in the recipes. “