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
Cost of Base Motor
Cost of all Special Components

304,00 DEM
39,60 DEM

C
304,00 DEM
79,20 DEM

D
304,00 DEM
118,80 DEM

E
304,00 DEM
198,00 DEM

304,00
396,00

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

DEM
DEM

DEM 13.800.000
DEM
65.625
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
Prod. orders and requisitions
Special components unit cost

Cost of Base Motor

Cost of Special Components
Order Processing Cost
Special Component Cost
Total Production Cost

DEM 19.500.000
DEM 325.000
DEM
60,00

Order A
DEM
304,00
DEM
39,60
DEM
210,29
DEM
60,00
DEM
613,89

Order B
DEM
304,00
DEM
79,20
DEM
210,29
DEM
120,00
DEM
713,49

Order C
DEM
304,00
DEM
118,80
DEM
210,29
DEM
180,00
DEM
813,09

Order D
DEM
304,00
DEM
198,00
DEM
210,29
DEM
300,00
DEM 1.012,29

DEM
DEM
DEM
DEM
DEM

Order E
304,00
396,00
210,29
600,00
1.510,29

Traditional System Five Orders Cost

The cost of the Base Motor and the Cost of the Special Component is shown below:

Cost of Base Motor

Cost of Special Components
Manufacturing Cost

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

Manufacturing Cost
%
Supported Related Cost

Order A
Order B
Order C
Order D
Order E
DEM
247,00 DEM
247,00 DEM
247,00 DEM
247,00 DEM
247,00
DEM
32,20 DEM
64,40 DEM
96,60 DEM
161,00 DEM
322,00
DEM
279,20 DEM
311,40 DEM
343,60 DEM
408,00 DEM
569,00

Order A
DEM 279,2
35%
DEM 97,72

Order B
DEM 311,4
35%
DEM 108,99

Order C
DEM 343,6
35%
DEM 120,26

Order D
DEM 408
35%
DEM 142,8

Order E
DEM 569
35%
DEM 199,15

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

Order A
Cost of Base Motor
DEM
247,00
Cost of Special Components DEM
32,20
Total Material Cost
DEM
279,20
Supported Related Cost
DEM
97,72
Total Production Cost
DEM
376,92

DEM
DEM
DEM
DEM
DEM

Order B
247,00
64,40
311,40
108,99
420,39

DEM
DEM
DEM
DEM
DEM

Order C
247,00
96,60
343,60
120,26
463,86

Order D
DEM
247,00
DEM
161,00
DEM
408,00
DEM
142,80
DEM
550,80

DEM
DEM
DEM
DEM
DEM

Order E
247,00
322,00
569,00
199,15
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

Order

Unit
1
10
20
100
1
10
20
100
1
10
20
100
1
10
20
100
1
10
20
100

Traditional
Manuf. Cost
Sup. Related Cost
Total Cost
279,20
97,72
376,92
2.792,00
977,20
3.769,20
5.584,00
1.954,40
7.538,40
27.920,00
9.772,00
37.692,00
311,40
108,99
420,39
3.114,00
1.089,90
4.203,90
6.228,00
2.179,80
8.407,80
31.140,00
10.899,00
42.039,00
343,60
120,26
463,86
3.436,00
1.202,60
4.638,60
6.872,00
2.405,20
9.277,20
34.360,00
12.026,00
46.386,00
408,00
142,80
550,80
4.080,00
1.428,00
5.508,00
8.160,00
2.856,00
11.016,00
40.800,00
14.280,00
55.080,00
569,00
199,15
768,15
5.690,00
1.991,50
7.681,50
11.380,00
3.983,00
15.363,00
56.900,00
19.915,00
76.815,00

Unit Cost
376,92
376,92
376,92
376,92
420,39
420,39
420,39
420,39
463,86
463,86
463,86
463,86
550,80
550,80
550,80
550,80
768,15
768,15
768,15
768,15

Process Oriented
Manuf. Cost
Sup. Related Cost Transferred Costs
279,20
64,40
270,29
2.792,00
644,00
270,29
5.584,00
1.288,00
270,29
27.920,00
6.440,00
270,29
311,40
71,80
330,29
3.114,00
718,00
330,29
6.228,00
1.436,00
330,29
31.140,00
7.180,00
330,29
343,60
79,20
390,29
3.436,00
792,00
390,29
6.872,00
1.584,00
390,29
34.360,00
7.920,00
390,29
408,00
94,00
510,29
4.080,00
940,00
510,29
8.160,00
1.880,00
510,29
40.800,00
9.400,00
510,29
569,00
131,00
810,29
5.690,00
1.310,00
810,29
11.380,00
2.620,00
810,29
56.900,00
13.100,00
810,29

Total Cost
613,89
3.706,29
7.142,29
34.630,29
713,49
4.162,29
7.994,29
38.650,29
813,09
4.618,29
8.846,29
42.670,29
1.012,29
5.530,29
10.550,29
50.710,29
1.510,29
7.810,29
14.810,29
70.810,29

Unit Cost
613,89
370,63
357,11
346,30
713,49
416,23
399,71
386,50
813,09
461,83
442,31
426,70
1.012,29
553,03
527,51
507,10
1.510,29
781,03
740,51
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 EMWs per unit cost

Exhibit 1
1987 Reconciliation - Traditional Cost System to Process-Oriented Systems (000)
Traditional
Material
Material overhead
Labor
Labor or machine overhead
Manufacturing cost

Process-Oriented

DM105,000
6,000
36,000
120,000

DM105,000
6,000
36,000
120,000

267,000 (74%)*

Engineering costs
Tooling costs
Administrative costs

12,000
22,500
60,000

Support-related cost*

94,500 (26%)

Customer order-processing
Special components processing
Total cost

Transferred

267,000 (74%)
DM(6,300)
0
(27,000)
(33,300) (9%)
13,800
19,500

DM361,500

DM

5,700
22,500
33,000
61,200 (17%)
13,800
19,500
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