43508041 Classic Pen Case

Topics: Costs, Profit, Cost accounting Pages: 14 (637 words) Published: June 13, 2015
Activity-Based Cost Systems
The Classic Pen Company
A Case Analysis

The Classic Pen Company – A Case for
Activity Based Costing
Introduction:
• Low-cost producer of traditional Blue and Black ink
pens
• Profit margins of over 20% of sales
• 5 years earlier- introduced Red Pens using same
technology at 3% premium
• Recently, introduced Purple Pens using same
technology at 10% premium.

Classic Pen Company – Issues facing the
Management
ISSUE 1 - Profitability

ISSUE 3 – Product Mix

While Red & Purple pens seem
to be more profitable, overall
profitability of the company is
falling

Process for Red and Purple
pens require more resources
(set-up time etc.)
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ISSUE 2 - Pricing

ISSUE 4 – Internal Processes

“Tough Global Competition” –

A lot of time spent on
scheduling and purchasing
activities

“Can the products be priced
better?”

Conventional Cost Sheet
Blue
Black
Red
Purple Total
DM
25,000 20,000
4,680
550
50,230
DL
10,000
8,000
1,800
200
20,000
OV
30,000 24,000
5,400
600
60,000
Total Cost 65,000 52,000 11,880
1,350
130,230
Sales

75,000 60,000 13,950

1,650

150,600

Profit

10,000

8,000

2,070

300

20,370

Profit Marging 13%

13%

15%

18%

14%

Shift in Costing: To ABC
Expenses
Cost Pools
Activities
Products

Indirect labour/Fringe benefits/computer
systems/machinery/maintenance/Energy
Indirect Labour/Computer Expenses/Machine
Expenses
Machine Setting/Handling Production Runs/Part
Administration/Machine Support

Classic Pen: Define Activities and
Activity Drivers
Activities
• Handle Production
Runs
• Set up Time
• Parts Administration
•  Machine Support
•  Direct Labour Fringe

Drivers






Production Runs
Setup hours
No. of Parts
Machine Hours
Direct Labour

Understanding Activities: Levels
• Machine expenses: Unit Level Activity
• Handle Production Runs: Batch Level
Activity
• Set up Expenses: Batch Level Activity
• Admin. Expenses: Product Level Activity
• Fringe Expenses: Facility Level

Forming Cost Pools: Under ABC
Indirect Labour
Computer Expenses
Machine Expense

28,000 20000 + 8000 (40% 0f direct labor)
10,000
14,000 (8000+4000+2000)

These expenses to be apportioned over the activities
mentioned in the previous slides using the
appropriate drivers.

Cost Allocation: Under ABC

Indirect labour Computer Exp. Machine Exp Total Activity Rate Handle Production Runs 50% 14,000 80% 8,000
22,000 150 146.7
Set up Time
40% 11,200
11,200 526 21.29
Parts Administration 10% 2,800 20% 2,000
4,800 4 1200
Machine Support
100% 14000 14,000 10000 1.4
Total

28,000

10,000

14000 52,000

How can the Classic Pen Company discover
what its true costs are?
OLD WAY
(What is spent?)

Activity Based Costing
SCHEDULE PRODUCTION RUNS
$ 22,000

Traditional accounting
INDIRECT LABOUR
$ 20,000

SET UP
$ 11,200

FRINGE BENEFITS
$ 8,000
COMPUTER SYSTEMS
$ 10,000
DEPRECIATION
$ 8,000

ADMINISTRATION
$ 4, 800

NEW WAY
(How is it
spent?)

MACHINE SUPPORT
$ 14,000

TOTAL

MAINTENANCE

$ 52,000

$ 4,000
ENERGY
$ 2,000

TOTAL

$ 52,000

Step 1 – Map resource Costs
to Activities

ABC Cost Sheet
Blue
Black
Red
Purple
Total
50,000 40,000
9,000
1,000 100,000
DM
25,000 20,000
4,680
550
50,230
DL
10,000
8,000
1,800
200
20,000
40% Fringe Benefits
4,000
3,200
720
80
8,000
Overheads
Machine Support
7,000
5,600
1,260
140
14,000
Prod Run Exp.
7,333
7,333
5,573
1,760
22,000
Set up Exp.
4,259
1,065
4,855
1,022
11,200
Admin Exp
1,200
1,200
1,200
1,200
4,800
TotalOverheads
19,792 15,198
12,888
4,122
52,000
Total Cost
CPU
Sales
Profit
Profit/unit
Profit Margin

58,792
1.18
75,000
1.50
16,208
0.32
22%

46,398
1.16
60,000
1.50
13,602
0.34
23%

20,088
2.23
13,950
1.55
-6,138
-0.68
-44%

4,952
4.95
1,650
1.65
-3,302
-3.30...
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