Siemens Case ReportExecutive Summary  Siemens Corporation is one of the world’s largest corporations, and is a producer of electrical and electronic products. In the year 1987, Siemens’s revenue was 51 billion deutschmarks.   The corporation was formed by seven major groups and five divisions. The focus of this case study is Electric Motor Works (EMW), which was the primary factory of Siemens since the 1970s. A change of strategy in 1987 helped EMW become a profitable producer of low volume customized A/C motors. After the change of strategy, the proportion of custom motors significantly increased from 20% of orders to 90%. Also, the manufacturing efficiency and capacity usage had been improved. A lot of equipment was replaced by automated equipment in order to manufacture common parts at a large volume. Meanwhile, low volume special parts largely depend on a manual production process. This means that processing common parts and special parts require different costs Therefore, the traditional costing system could no longer properly account for the overhead costs. A new costing system as introduced to solve the problem. With two new cost pools, Order Processing Cost and Special Components Cost, support related costs could be allocated according to the amount of orders. According to the analysis in this report, the new costing system could show the changing cost per unit in relation to the amount of orders. It corresponds with common sense that an increase in products sold results in a smaller cost per unit. As a result, the new costing system can be helpful in building up marketing strategies to encourage large volume orders. For example, providing discounts or free-delivery services on larger orders. Mr. Karl-Heinz Lottes didn’t over-estimate the positive impact of the new costing system.
Case ReportTraditional Costing SystemIn 1987, the total costs were still calculated directly by using assigned cost pools. They are basically two parts—manufacturing costs and supported related costs. The support related overhead is not the same as support related costs. That is why to calculate the total costs by using the traditional system. The total supported related costs should be 35% multiplied by manufacturing costs, as indicated on page 3.A, B, C, D, E orders require one base motor and one or several special components. In the traditional system, the calculation is simply multiplying the cost of base motor or special components. The detailed calculation is shown in Exhibit 2. Simply copy the same worksheet and change the number of units, and we can get costs for those five orders with 1, 10, 20, and, 100 units.
3. Modeled Cost Comparison The standard cost comparison is a very important part of our system. The cost comparison is used to compare suppliers to one another in real data. Each year, we add up the raw performance of each manufacturer to produce parts of that manufacturer and compare that to its best guess. This means you are comparing it against its best guess. But we want to use one measure of reliability. There must be reliable reliability. A unit that works well, or that will do well, is at risk from an inaccessibility strike. These are both the issues that must be dealt with by a system as accurate as a cost comparison, but they are very different. The most important difference is that we do that by determining that, say, the final cost is 30% or 80% more than the standard cost, which is the cost that we would consider critical. For example, if you could figure that a car needs to run for 60,000 miles to be in the United States, you can get 90% of that to meet the standard cost, which is the cost of having to get 80 miles, but that needs to be 60,000 miles of this same car. This works out to be more or less 10% more expensive than a standard cost. That translates to a $25 price tag because it will require more energy to develop the car in the future. Because of the differences, cost analysis takes a lot less time, and only requires a little amount of expertise in your field to be accurate. This requires a lot more time and planning effort. At the same time, if we find that costs are more complex than we believed, and there was a strike or other event that would change the cost of the car, that will take some kind of action to protect its future costs, which is not that difficult. Therefore, we do it by applying those same techniques. This process is called Cost Analysis. I will not start writing about Cost Analysis because I can’t do it by himself. Since the concept is more complex than that, I will provide a tutorial to explain why that is not the case. But first, I want to give you the point as to why a cost comparison system in this country does not work. I will not give technical reasons. In general, the more people that enter into and leave this nation, the more likely prices will fall. But I will say that cost estimates for a number of manufacturers would likely fall if their prices were to fall under this system. This would mean no more costs going into the production system, then lowering the production cost by 2 cents for every dollar in the cost of production. It would lead to a decrease in the value of the product. Thus, some of the more important aspects of cost analysis, and the most effective one, come from technology rather than from people. We may not have developed it, but our systems are very reliable. The technology of our system does not necessarily come from our factories, but from our suppliers. The cost analysis of our standard system can work out to 40%, 30% more than the price of every other model. So what we can do from an engineering point of view is we have to have data from a handful of suppliers. If we put data from different companies, we will learn things that are