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Savi Technology: Indirect Costs and Job Costing

Authors: Steven Huddart and Bacilio Palomo

This case examines the accounting system of a small company that produces customized electronic equipment under cost-plus federal procurement contracts as well as fixed-price commercial agreements. The facts in the case are drawn from a high technology start-up company headquartered in Palo Alto, California.

Principal issues for discussion are:

• the extent to which the structure of the accounting system (chart of accounts, cost pools, and allocation bases) is determined by government procurement regulations;

• the appropriateness of a government-mandated cost model for internal decision-making purposes;

• the incentives created by the accounting system to subcontract work associated with cost-plus contracts and to undertake in-house work associated with fixed-price contracts;

• the difficulty of determining the profitability of individual contracts, even in a small industrial concern;

• the differences among cost categorizations for different business purposes, like financial reporting, reporting to government auditors, and internal decision-making (e.g., costs may be treated as inventoriable for one purpose, but may be treated as period costs for another purpose).

Subject(s): Auditing; Cost allocation; Government agencies; High technology; Research and development; SBIR

Setting Information: Geographic Setting: California Industry Setting: computer devices Number of Employees: 50 Case Time Frame Start: 1992 Case Time Frame End: 1992

Supplemental Material(s): Teaching note, (A156T), 6p, Huddart, Steven

Type: Case (Field) Publication Date: 7/1/94 Product Number: A156 Length: 20p Source: Stanford University

Update

Savi has been tremendously successful. Rob Reis sold Savi to Texas Instruments in the mid-1990s. Lockheed/Martin acquired it from Texas Instruments in 2003. It is a standalone, profitable $500MM business for Lockheed Martin in 2010.

Here is a video clip of Vic Verma of Savi describing the Internet of Things at Stanford University in 2004. Here is another link to the Vic Verma Savi clip.

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Steven Huddart
Smeal College of Business, Penn State University, University Park, PA 16802-3603 USA
(814) 865-0041
(814) 863-8393 fax
huddart@psu.edu
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