Siemens Electric Motor Works Case Study

Process-Oriented Costing

Content

1. Introduction
2. Issues
3. Analysis

1. Diagram the traditional cost system and the new cost system
2. Calculate the cost of the five orders in Exhibit 4 under the traditional and new systems
3. How does the cost/unit differ under the traditional and new costing system and the number of units ordered increases?
4. How does/can the PROKASTA system support the strategy of the firm in ways that the traditional system cannot? 
5. How could Siemens further refine their costing system?

1. Conclusion

1. Introduction

Siemens EMW plant, in Bad Neustadt, was built in 1937 to manufacture refrigerator motors but this was not successful, and Mr. Siemens decided to manufacture electric motors. After the second world war this plant was the only operational plant capable of producing electric motors in West Germany. In the 1970’s the factory produced largely standard motors 80% and for 20% customized motors. The total annual volume of motors produced was 230,000 pieces.

In the early 1980’s it had become clear for Siemens management that they could not compete in price with the low-cost production of the Eastern European countries and they had to change their company strategy to survive. After an extensive study it has become clear that Siemens EMW could be a profitable company if they went into the market of low volume customized motors.

From 1985-1988 Siemens EMW spend DM50 million in changing their plant to produce many more types in smaller production runs. In 1987 a total of 65,625 orders had been accepted of which 90% were custom motors and a total of 630,000 motors were produced.

1. Issues

The costing system of Siemens EMW was based on the system invented in 1926, which constituted of the following (further detail provided in Appendix A):

1. Material and labor was directly assigned to the product
2. Overheads were divided into three categories

1. Material-related – based on deutschemarks/direct material used by a product.
2. Production-related – direct labor or machine hours and traced into the cost pool
3. Support-related – based on direct materials and direct labor cost.

The breakdown of the category as percentage of total cost was as follows:

Table 1: Percentage of total cost distribution based on traditional cost system Siemens EMW

Two years into the new strategy of customized motors problems with the traditional costing system occurred. There was an inability to capture the relation between the increased support costs and the change in product mix. The old system the cost was allocated to the motor. The management thought that with the new strategy the cost was better allocated with the number of orders received or the number of customized components required (diagram of new cost system in presented below)

1. Analysis

1. Diagram the traditional cost system and the new cost system (think about the building blocks of costing systems that we discussed in session 3).

• Traditional costing system

[pic 1]

• New costing system

[pic 2]

b) Calculate the cost of the five orders in Exhibit 4 under the traditional and new systems. Hint: first calculate the cost of processing an order and handling a special component.