• Cases
• I'ER_PUSTAKAAN
SI~LICRAM, INC.: J<:r.RCTRONIC TESTI:\G
\ve put in a plccc or automated equlpment a year ago
that only fits the requirements of one customer, This
equipment reduced the direct labor required to test his
components and. because of Our tabor-based burden al-
locatlon system. substantially reduced hi. cos rs, But
putting a $40.000 machine IntO the general burden pool
raised the costs to our other customers. It just doesn't
make sense shooUnc yourscli in the 100( at the same
lime you arc lowering the COMp.1ny'SCOStof operations.
Introduction
The Electronic Testing Center (ETO). a division of
Selig nun. Tnc., provided centralized testing for elcc-
tronic components such as integrated circuits. E'rO was
created (IS a result of a decision in 1979 to consolidate
electronic testing from I I differenl divisions of
Seligram. P,TO commenced services to these divisions
in 1983. Ltwas estimated Ihat centralization would save
Seligrarn in excess of $20 million in testing equipment
investment over the next flve years.
ET() operated as u cost center und transferred prod ..
ucts to other divisions nl full COSt(dlrect costs plus allo-
cated burden). Although ETO was a captive division,
other divisions within Seligrnm were allowed to use
outside testing services if E'l'O could not meet their cost
or service requirements. ETO was permitted 10 devote
up to 100/0of its testing capacity ttl outside customers
but chose to work mainly with other Seligram divisions
due to limited marketing resources,
ETO employed approximately 60 hourly personnel
and 40 administrative and technical staff members. Bud-
geted expenses were $7.9 million in 1988 <see Exhibit I).
Testing Procedures
ETO expected to te.\! between 35 and 40 million com-
ponents in 1988. These components included integrated
circuits (Ies). diode •• trnnsisrors, capacitors. resistors,
'Ilut; c.'lie .....11' prep;u'tld by Pro(e$IOC' Pt.ler Jl 0 Tume),. Portl~ Sl8.Ie Uni·
~'t'lSil)!.;"1".4 Uri~ophl" lUl\('r, c)or.IC,'r~l I'lueJrnl (IFnde.r(he ~lIpel'\'isjon of Pro-
resse, I(,,"in C(~r)
COI)}riy.l Q::) l\lt'll( by .l,e 1~1':)!I;k"' :111"hdlll"', nf 1I1II"\'llWC'.olkge Hv·
v.vd BIilJrlc:-lI Sd ..,M,1Ic a..c 11\9·0114.
\'-~ .., MAKSI·I'l'I\K ffUI .
OPERATlO:'XS
transformers, relays. and crystals. Component testing
was required for IWO reasons. First. if defective cornpo-
nents were not caught early in the manufacturing cycle.
the COStof repair could exceed the manufacturing cost
of tile pcodocr itself. Studies indicated that B defective
resistor caught before use in the manufacruring process
COSttwo cents. If tbe resistor was nO{ caught until the
end product was in the field, however. the cost of repair
could ron into the thousands of dollars. Second, a large
proportion of Scligrarn's work was defense related. Mil-
itary specifications frequently required extensive testing
of components utilized ill aerospace and naval products.
By 1988. ETO had the ability to test 6.500 dilfercru
components. Typically, however, the division would test
about 500 different components each month and be-
tween 3,000 and 3,50() per year, Components were I'C-
ceived from customers in lots; ill 1988 ETO would rc-
ceivc approximately 12,000 IOlS of components.
ETO performed both electrical and mechanical test.
ing. Electrical testing involved measuring the electrical
characteristics of the components and compnring those
measurements with the components' specifications. For
example. the specifications for all amplifier may have
called lor a l-volt input to be arnplified into a to-vcu
output. ETO would deliver a l-volt input to the compo-
ncru. By measuring the amplifier's output. ETO gauged
its conformance with specifications.
Mechanical testing included solderability, compo-
neru burn-in, thermal shock. lead straightening. and
leak detection. Solderability involved the inspection of
components to see if they held solder. Burn-in was the
extended powering of components at high temperature.
Thermal shock involved the cycling of components be-
tween high and low temperatures. Lead ~lr.lightcning
was the detection and correction of bent leads on com-
ponents such us axial compooerus. Leak detection ex-
amined hermetically sealed ICs for leaks.
Components varied significantly in the number and
type of electrical and mechanical testing procedures
they required. This variation resulted in about 200 dif·
ferent srandard process flows for the division. Process
ftows were determined b)' the different combinations of
tests and specifications requested by the customer.
Based on these combinations, ETO planners deter-
mined the routing of components between testing
67
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,
68 CHAPTER 2 TRADITIONAL STAGE" COST SYSTEMS
equipment and the type of tests to he performed at each
station. ICs, for example, could follow six different
flows through the facility, While some ICs only re-
quired clecirical testing at room tempcraurre, solder-
abiliry, and leak detection, others also required thermal
shock and burn-in.
F.acb type of component required separate softwa..e
development, and custom tools and fixtures ",'ere often
required. Software, tools, and fixtures were developed
by the engineering group, which was made up of spe-
cialists in software development, equipment mainte-
nance, calibration and repair, tooling and (ixturing, nnd
testing equipment operation. Software engineers devel-
oped programs for specific applications. The programs
were then retained in a software library for future usc.
E'TO had 6,500 different software programs on file. of
which 1,300 were programs developed in the past year.
ETO also had an inventory of 1,500 tools and fixtures,
of which 300 had been developed in the past year, The
large number of tools and fixtures allowed (he testing of
ccmponcnu with a wide variety of leads; pin combine-
lions, and mating configurations.
The testing facHilY was divided into l \110 1'001115, The
main testing room COntained the equipment used for
electrical testing, The mechanical room contained the
equipment used for mechanical testing, plus incoming
receiving and the stockroom, A total of 20 people
worked in the two moms on each of IWO main shifts,
"nel 10 people worked on the ni~lI shift.
Cost Accounting System
The cost accounting system measured l\VO componems
of COst: direct labor lind burden. Burden was grouped
into a single cost pool which included burden associ-
ated with each of the resring rooms, as well as the engi-
neering burden costs relating to software and toohng
development and the administrative COSISof the divi-
sion. 'Total burden costs were divided by the sum of
testing and engineering labor dollars to arrive at a bur-
den rate per direct labor dollar. The division costed each
lot of components. Burden was calculated for each lot
by multiplying the acrual direct labor dollars associated
with the lot by the 145% of burden rate. The resulting
burden was then added to lhe actual direct labor COSL' to
determine the 100's total Cost. In 1988, the faciiny-wide
burden rille was 145% of each direct labor dollar. of
which more than 25% was auriburable 10 equipment de-
preciauon (sec Exhibit 2).
Signs of Obsolescence
Several trend, pointed to the obsolescence of the labor-
based hurden allocation process. Since the founding of
the division in 1983. direct labor hours per lot tested
had been declining slendily. This trend was aggravated
by an increased dependence on vendor cerrification.
Vendor certification was a key component of just- in-
time (lIT) delivery. With vendor certification. Seli-
gram's suppliers did the primary resting' of components.
ETO then utilized statistical sampling to verify that the
supplier's production process was still in control. Thus,
while JIT led to an Increased "umber of smaller lots be-
ing received by ETO, vendor certification reduced the
number of tests performed. Early indicauons were thai
JlT deliveries would account for 30% of Seligrarn's
shipments within the next five years.
In addition to declining direct labor content lind
fewer test lms, the obsolescence of the labor-based allo-
cation system was intensified by II shift from simple in-
spection services to broader based ICSt technology, On
complex parts requiring screening. environmcnuil con-
ditioning, and resdng, the division wus cousistcruly
cheaper than outside service>. Where only elementary
testing was required. however, low-tech outside labora ..
tcrics were often cheaper, espeeiully on large lots. 'The
advantage that [he division brought customers over the
outside labs "'lIS thal lhe laucr provided essentially no
engineering support, whereas ETO with its resident en-
ginccring resources was able io support such service On
a rapid and cost-effective basis. The shifl to more tech-
nically sophisticated services prompted 3 shifl. in rhe 1.-
bor mix from direct (0 indire ...
~l personnel. The division
expected to see a crossover between engineering head
count and hourly bead count early in the 19')Os.
Finally, the introduction or higher technology com-
ponenrs created the need for more automatic tcxriug.
longer tcsr cycles, and more data per pan, Digital com-
ponents. for example, were currcrnly tested for up to
100 conditions (combinations of electrical input and
output states). 'The new generation of digital compo-
nents, on the other hand. would be much more complex
and require verification of tip to 10.000 conditions.
These would require vel')' expensive highly automated
equipment. This increase in automation would, in turn.
lead to a smaller base of direct labor to absorb the de-
preciation costs of this new equipment.
There were fears lhal [he ~uhing increase in burden
rates would drive some customers away, ETO had
-

already noticed an increase ill the number and fre-
quency of complaints from ccstomers !\-'garding the
rates (hey were charged lor testing.
The division's uccounting manager proposed a new
cost accounting system to alleviate the problem. Under
tillS new system, burden would be directly traced to
twOcos. pools. Tile first pool would contain burden re-
lated to the administrative and technical functions (di-
vlslcn management. engineering, planning. and adrnin-
jstrutivc personnel). This pool would be charged On a
rate per direct labor dollar. The second pool would in-
clude all other burden costs and would be charged
based on machine hours. Exhibit 3 provides the pro-
posed burden rates.
Shortly after the accounting manager submitted his
proposal. a ccnsultanr hired by Seligram's corporate
management prepared an assessment of ETO'" cost sys-
tem. He recommended the implementation of a three-
burden pool system utili7.ingseparate burden centers for
each test room and a common technical and administra-
live pool. Burden would be directly traced to each of
the three burden pools. Like the accounting manager"
.yMcm, burden costs in the test rooms would then be al-
located on a machine hour basis. Technical and adrnin-
lstraiivc costs would continue to be charged on a rate
per direct labor dollar.
'to examine the impact of the two alternative. sys-
tems, E.TO management asked that a study be con-
ducted On a representative sample of pans. Exhibit 4
provides a breakdown of actual direct labor and ma-
chine hour requirements per 101for thc five components
selected for the study.
Technological Future
In 1988, the division faced major changes in the tech-
nology of testing that required irnporumt equipment ac-
quisition decisions, The existing testing equipment was
gelling old and would not be able to keep pace with
developments in component recbnology, Existing com-
ponents, for example, had between 16 and 40 input!
output terminations (c.g., pins or other mating configu-
TRADITIONAL STAt~t>II COST SYSTEMS 69
rations), and ETO's equipment could bandle up to 120
terminations. Althougb the 120-tcrminalion limit had
only been reached a couple of rimes in the pasl few
years, a neev gcnernrion of components with up to 256
terminations was already being developed. Similarly,
the upper limit of frequency on existing components
was 2() MHl. (million cycles per second), whereas the
frequency on the next generation of components was
expected 1.0 be 50 MH%.
The equipment required to teNI the next gene.....
nion of
components would be expensive. Each machine CO$tap-
proximately $2 million. Testing on this equipment
would be more automated than existing equipment,
with longer test cycles and the generation of more tCSL
~atu per part. It wus also likely (hat lot sizes would be
tnrger,The new equipment would not replace the exist-
ing equipment bul would merely add capabilities ETO
did not currently possess. Addilionally, the new equip-
meru would only be needed to service (he requirements
of one Or two customers in the foreseeable future. Ex-
hibit S provides u summary of the new equipment's eco-
nomics and operating characteristics.
The impact of this new equipment would be an ac-
celeration in the decline in direcl labor hours pcr 101.of
cornponenrs. At 'he sante lime, burden would increase
with the additional depreciation and engineering: costs
..ssociated with the new equipment. This would resuu in
• large increase in the burden nile per direct labor dol-
tar, As Paul Carte, Manager of lITO. saw it, the acquisi-
lion of the new equipment could have a disastrous effect
on the division', pricing structure if rhe labor-based al-
location system remained in use:
We plan on iL')\'e.~(i"g $2 million On It large etectrceie It~.S1·
ing machine to (t~(Ihe chips of one or two CUS(OIII(:r,). This
machine will be very fast and willrequire little direct In-
bur. Its. acquisition will have u significanlc::ff(..'Ct on Our per
direct labor dollar burden fate, which will result inan In-
crease in charges to Our other CUSIOfOCrs. It i~clear that a
number of CUstomers will walk aW3)' if we try to 1)'1~SIbis
increase OJ). I am afraid thai \VC will IO~e25% of OUI cus-
rnmer base if we don't change our COSt system,
70 CHAI'I'ER 2 TRADITIONAL STAGE II COST SYS'J'EMS

EXHIBIT J
SELlGRAM. INC.:
ELECTRONIC TESTING CENTER
1988 Budgeted Expenses

Direct labor 53.260,015

Indirect labor 859.242
Salary expense 394.211
Supplies &: expenses 538,029
Services' 245.226
Personnel allocations' 229.140
Service allocations! 2.448.134

Total budgeted expenses $7.973.097

'Tndudes to(ll ~p:iir. cornpctcr (,'l(~I'1'(,',maintenance stores, and service

(OS( trilnsfcrf, f:om other division"
"lncludes indiY@I.'1311d salarit!d 1;:n'll'hlyt.:C (rln&~'bcru:lhij., pcrscnnct depart-
me,,', S<(1Jrily. $tlJ":$lwar~h(')uNng, .nd hOUdl)'$/V4lc:atlons:,
.ll.ndu:d% building occupancy, telephone •. \ItprlN:w!lon, m(\)rrn:'liQrI sys-
ttIm, and dau control.

EXHIBIT 2
SEUGRAM, INC.:
ELECTRONIC TESTING OPERATIONS
Calculationof Burden Rotc
Based on 1988 Plan

BURDEN F.l..EMEN't

Indirect labor $859,242

Salary expense 394,211
Supplies &: expenses 538,029
Services 245.226
Personnel allocauons 229.140
Service allocations 2.448.134
Total burden' $4,713.982

Burden rate TOTAL BURDEN S

DIRECT LABOR S
54.713.982
=
3.260,015

144.6%

Effective rate 145%

Variable $1,426,317

O.:pn:ci~tion 1,288,000
Other fixed: l.999.665
'total burden: $4,113,982
 CHM'1'F.R 2 TRADITIONAL SI'AC:E " COST SYSTEMS 71

EXHIBIT 3
SELIGRAM, INC.:
ELECTRONIC TESTING OPERATIONS
Proposed Burden Rates
Based on 1988 Plan

MACHJNE 110UR RATES

MACHINE HRS

:viain test room 33.201

Mechanical test room 17.103
Total ~
Machine Hour Rat. = Burden $ = $4:029.379 =$80.10
Machine Hrs ~0.304
Effective machine hour rate = S80.00
Rale per Direct Labor Hour
Total engineering 01< administrative burden $ = $684.603'
Total dlrect labor dollars = i3,260,015'
Burden rate = Engr & admin $ = 5684.603 = 21 %
. Direct Ibr S 53.260,015
Effective burden rate per direct labor $ = 20%

Fixed
Vllrj,;oie Odl'f'l:dlltiOlJ Olh~T TOl4l1
t>.f;lin 1t:.1 room $ 887.379 $ 88.779 $1.126.958 52.103.116
l<otlXh.a.nlc:d ~$\ 100m .. ,,3.833 808.100 679.327 1.926.263
Total bul'dm $1,331,212 ~ SI.801.2S5 54.029.379

Vt),rI~blt s 95.105
fjxed:
Dt!pr(('i.lIion 391.118
Otlw, 19~.380
ToW 56&1.603
stndUck; all direct b_boI'C'OIOtS. incllldJng dift'd labo~oo!>l1lnrurred in both :~
eocms 11.' wen as eI18;ncmns.

EXHIBtT4
SELIGRAM, INC.:
ELECTRONIC TESTING OPERA110NS
Direct Labor and Machine HOUT Requlrements
Actuals for One Lot

M.\Cffit.,;E uOURS

DIRECT MAIN MEell.

LABOR S ROOM «OOM iOTAl
Ie A S 917 8.5 10.0 18.5
!CD 2051 14.0 26.0 40.0
Capacitor 1094 3.0 4.5 7.5
Amplifier 525 4.0 1.0 5.0
Diode 5'19 7.0 5.0 12.0

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