Siemens Coma Case

MANAGEMENT ACCOUNTING - II
SIEMENS ELECTRIC MOTOR WORKS (A)

PROCESS ORIENTED COSTING
B19135: DHAIRYA DESAI

B19138: HAPPY KUKREJA
B19140: NITISH JADHAV
B19143: KRISHNA AGARWAL
B19176: SUYASH SAKLECHA
Executive summary:
In 1970, 200 types of standard motors with a total volume of 230,000 motors were produced.
Standard motors contributed to 80% of the sales back then and customized motors contributed
20%. During 1985 to 1988 owing to the changing market demand and conditions, they switched
to producing low volume customized motors. A switch in business strategy needed a change in its
costing method to account for the excess cost of manufacturing special components. Based on our
analysis the company needs to shift to PROKASTA method of costing and create two new cost
pools i.e. Order Processing and Special Components cost pools for better transparency and
decision making (on accepting or rejecting an order).
Problem statement:
With the change in strategy of the company, a change in the costing method was needed. Due to a
higher number of custom motors, the support related overheads increased and it was necessary to
find a relation between support cost and the product mix.
Siemens has adopted the same costing principle from 1926 to 1985, which divides the overhead
costs into three broad categories as follows:
Cost Type Description Allocation Principle
Material Related The acquisition cost of Money spent on the acquisition of

materials materials
Production Traced back to cost centres 1. Labour Intensive: Direct labour hours
Related 2. Machine Intensive: Machine hours
Support Related Order processing costs Sum of direct material costs, labour costs,
material OHs and production OHs
Due to a higher number of orders and a lesser number of motors per order, the work of the support
department in scheduling, inventory handling, requisition of items increased exponentially. The
work which was now required for one custom motor was equivalents to the work for 100 standard
motors.
Alternatives:
1. Do Nothing: Siemens can continue to adopt the same costing system as before
2. Update the Costing System: Siemens can choose to update the system to meet the
changing requirements
Criteria of evaluation:
1. Cost of Transition should be Low: The transition cost involves the cost required to install
the new costing system across the company and also the training cost incurred on the
current employees.
2. The Overheads should be Distributed Accurately (Error in Accounting is low): The
main problem that Siemens is facing is that it is unable to accurately distribute the overhead
costs. Any changes in the system should address this issue.
3. Updating the Costing System should prepare the firm for Future Strategy Changes
(Low chances of future problems): This problem has arisen primarily because of a shift
in the firm’s strategy. Thus any new system adopted should be flexible enough to
accommodate future changes in strategy.
Evaluation of Alternatives:
Fitting the Alternatives with the Criteria: Given the alternatives available discuss which is suitable
in the given context.
Criteria
Alternative
Cost of transition Error in Accounting Future challenges
Do Nothing Low High High
Update System Medium Low Low

Most Probable Solution:
Based on our criteria for evaluating the alternatives, Siemens should change the way it allocates
the support related overheads and adopt the PROKASTA method.
As identified by Siemens, with their new strategy a majority of their support overhead costs have
shifted to the processing and review processes. The traditional costing method was unable to
accommodate for this shift in costs and thus the unit costing obtained was erroneous. The
PROKASTA method splits the support overheads into order processing cost and special
components cost. The order processing costs are allocated based on the number of orders and the
special components costs are distributed on the number of special components used for that unit.
These two overhead costs are classified as PROKASTA costs and the manufacturing costs are
classified as Pre-PROKASTA costs.
Break up of PROKASTA Overheads:

1. Costs related to Order Processing
1.1. Order Receiving
1.2. Product Costing and Bidding
1.3. Shipping
1.4. Billing
2. Costs related to Special Components
2.1. Technical Examination of Incoming Orders
2.2. Scheduling and Production Control
2.3. Inventory Handling
2.4. Product Costing and Bidding
2.5. Product Development
2.6. Purchasing
2.7. Receiving
- Traditional Process Oriented
Material 105000 105000
Material Related OH 6000 6000
Labor 36000 36000
Production Related OH 120000 120000
PRE-
Manufacturing Cost 267000 267000 PROKASTA
COST
Engineering Cost 12000 5700
Tooling Cost 22500 22500
Admin. Cost 60000 33000
Support Related Cost 94500 61200
Order Processing Cost 13800
PROKASTA
Special Components Cost 19500
COST
Total Cost 361500 361500
Adopting this costing method will provide SIEMENS with an order of their products as per their
contributions. This will help them to accept orders with the highest contributions and improve
profitability while also help them understand on which orders they can provide discounts to offer
competitive prices.

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MANAGEMENT ACCOUNTING - II

SIEMENS ELECTRIC MOTOR WORKS (A)

B19135: DHAIRYA DESAI

Cost Type Description Allocation Principle

Material Related The acquisition cost of Money spent on the acquisition of

Do Nothing Low High High

Update System Medium Low Low

Break up of PROKASTA Overheads:

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