Siemens Case

Group G
(Mezyad Almasoud, Annie Chor, Unoma Eke,
Alberto Garza Hauser, Sharad Harjai, Antonio Semeraro)
BMW
Strategic Analysis

Group E
Process Oriented System – Five Orders’ Cost
 The cost of the base motor from which the customized product was derived and the cost of each custom component was
calculated using the traditional cost system but with the new, smaller support-related cost pool:

A B C D E
Cost of Base Motor DEM 304,00 DEM 304,00 DEM 304,00 DEM 304,00 DEM 304,00
Cost of all Special Components DEM 39,60 DEM 79,20 DEM 118,80 DEM 198,00 DEM 396,00

 The cost of processing an order is allocated using the number of orders as allocation base:

Order processing cost DEM 13.800.000

# orders DEM 65.625
Order processing unit cost DEM 210,29

 The cost of handling a special component is allocated using the number of production orders and requisition as allocation Base:

Special components cost DEM 19.500.000

Prod. orders and requisitions DEM 325.000
Special components unit cost DEM 60,00

Order A Order B Order C Order D Order E

Cost of Base Motor DEM 304,00 DEM 304,00 DEM 304,00 DEM 304,00 DEM 304,00
Cost of Special Components DEM 39,60 DEM 79,20 DEM 118,80 DEM 198,00 DEM 396,00
Order Processing Cost DEM 210,29 DEM 210,29 DEM 210,29 DEM 210,29 DEM 210,29
Special Component Cost DEM 60,00 DEM 120,00 DEM 180,00 DEM 300,00 DEM 600,00
Total Production Cost DEM 613,89 DEM 713,49 DEM 813,09 DEM 1.012,29 DEM 1.510,29
Traditional System – Five Orders’ Cost
 The cost of the Base Motor and the Cost of the Special Component is shown below:

Order A Order B Order C Order D Order E

Cost of Base Motor DEM 247,00 DEM 247,00 DEM 247,00 DEM 247,00 DEM 247,00
Cost of Special Components DEM 32,20 DEM 64,40 DEM 96,60 DEM 161,00 DEM 322,00
Manufacturing Cost DEM 279,20 DEM 311,40 DEM 343,60 DEM 408,00 DEM 569,00

 The Supported Related Cost is equal at the 35% of the Manufacturing Cost:

Order A Order B Order C Order D Order E

Manufacturing Cost DEM 279,2 DEM 311,4 DEM 343,6 DEM 408 DEM 569
% 35% 35% 35% 35% 35%
Supported Related Cost DEM 97,72 DEM 108,99 DEM 120,26 DEM 142,8 DEM 199,15

 The Total Production Cost is obtained summing up the Manufacturing Cost and the Supported Related Cost

Order A Order B Order C Order D Order E

Cost of Base Motor DEM 247,00 DEM 247,00 DEM 247,00 DEM 247,00 DEM 247,00
Cost of Special Components DEM 32,20 DEM 64,40 DEM 96,60 DEM 161,00 DEM 322,00
Total Material Cost DEM 279,20 DEM 311,40 DEM 343,60 DEM 408,00 DEM 569,00
Supported Related Cost DEM 97,72 DEM 108,99 DEM 120,26 DEM 142,80 DEM 199,15
Total Production Cost DEM 376,92 DEM 420,39 DEM 463,86 DEM 550,80 DEM 768,15
Traditional and new system costs for each order if 1 unit,
10 units, 20 units, or 100 units are ordered
 For the traditional system, the manufacturing cost and the supported related cost are multiplied times the number of units (1,
10, 20, and 100) of each order

 For the process oriented system, the manufacturing cost and the supported related cost are multiplied times the number of units
(1, 10, 20, and 100) of each order, while the transferred cost are constant

Traditional Process Oriented

Order Unit
Manuf. Cost Sup. Related Cost Total Cost Unit Cost Manuf. Cost Sup. Related Cost Transferred Costs Total Cost Unit Cost
1 279,20 97,72 376,92 376,92 279,20 64,40 270,29 613,89 613,89
10 2.792,00 977,20 3.769,20 376,92 2.792,00 644,00 270,29 3.706,29 370,63
A
20 5.584,00 1.954,40 7.538,40 376,92 5.584,00 1.288,00 270,29 7.142,29 357,11
100 27.920,00 9.772,00 37.692,00 376,92 27.920,00 6.440,00 270,29 34.630,29 346,30
1 311,40 108,99 420,39 420,39 311,40 71,80 330,29 713,49 713,49
10 3.114,00 1.089,90 4.203,90 420,39 3.114,00 718,00 330,29 4.162,29 416,23
B
20 6.228,00 2.179,80 8.407,80 420,39 6.228,00 1.436,00 330,29 7.994,29 399,71
100 31.140,00 10.899,00 42.039,00 420,39 31.140,00 7.180,00 330,29 38.650,29 386,50
1 343,60 120,26 463,86 463,86 343,60 79,20 390,29 813,09 813,09
10 3.436,00 1.202,60 4.638,60 463,86 3.436,00 792,00 390,29 4.618,29 461,83
C
20 6.872,00 2.405,20 9.277,20 463,86 6.872,00 1.584,00 390,29 8.846,29 442,31
100 34.360,00 12.026,00 46.386,00 463,86 34.360,00 7.920,00 390,29 42.670,29 426,70
1 408,00 142,80 550,80 550,80 408,00 94,00 510,29 1.012,29 1.012,29
10 4.080,00 1.428,00 5.508,00 550,80 4.080,00 940,00 510,29 5.530,29 553,03
D
20 8.160,00 2.856,00 11.016,00 550,80 8.160,00 1.880,00 510,29 10.550,29 527,51
100 40.800,00 14.280,00 55.080,00 550,80 40.800,00 9.400,00 510,29 50.710,29 507,10
1 569,00 199,15 768,15 768,15 569,00 131,00 810,29 1.510,29 1.510,29
10 5.690,00 1.991,50 7.681,50 768,15 5.690,00 1.310,00 810,29 7.810,29 781,03
E
20 11.380,00 3.983,00 15.363,00 768,15 11.380,00 2.620,00 810,29 14.810,29 740,51
100 56.900,00 19.915,00 76.815,00 768,15 56.900,00 13.100,00 810,29 70.810,29 708,10
Product costs against volume ordered

Cost per Unit

Does the new system support the strategy of the firm in
ways that the traditional system cannot? Is Mr. Karl-Heinz
Lottes over-estimating the value of the new system?
 In 1987, Siemens Electric Motor Works (EMW) implemented a new strategy, in particular it decided to
produce low volume, customized A/C motors

 The decision of the firm to switch to a more refined system supports the new strategy of the firm because the
demand of customized product is one of the most important reason that lead to a refinement of the cost
system

 In particular, Siemens EMW refined the old previous system allocating the supported related cost – overhead
cost - to cost objects (number of orders for order processing cost and number of production orders and
requisitions for special component cost) instead of computing it as a percentage of the pre - manufacturing
cost

 The calculation showed in the previous slide show that the new system is more effective than the previous
one. In fact, given that the 74% of the orders are for less that 5 units, Siemens EMW is able to charge the right
price to its customers. In fact, using the flat unit cost calculated with the traditional system, Siemens EMW
would have underestimated the cost for orders with few units and overestimated the cost for orders with
many units

 In addition, Siemens EMW should discourage its customers to bid for small orders because orders greater than
10 units minimize Siemens EMW’s per unit cost
Exhibit 1

1987 Reconciliation - Traditional Cost System to Process-Oriented Systems (000)

Traditional Transferred Process-Oriented

Material DM105,000 DM105,000
Material overhead 6,000 6,000
Labor 36,000 36,000
Labor or machine overhead 120,000 120,000
Manufacturing cost 267,000 (74%)* 267,000 (74%)
Engineering costs 12,000 DM(6,300) 5,700
Tooling costs 22,500 0 22,500
Administrative costs 60,000 (27,000) 33,000
Support-related cost* 94,500 (26%) (33,300) (9%) 61,200 (17%)
Customer order-processing 13,800 13,800
Special components processing 19,500 19,500

Total cost DM361,500 DM 0 DM361,500

Exhibit 2 – Product cost vs. volume (1/3)
Order A

Total Production Cost Unit Production Cost

Order B

Total Production Cost Unit Production Cost

Exhibit 3 – Product cost vs. volume (2/3)
Order C

Total Production Cost Unit Production Cost

Order D

Total Production Cost Unit Production Cost

Exhibit 4 – Product cost vs. volume (3/3)
Order E

Total Production Cost Unit Production Cost