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Solutions Classic Pen Company
School of Business and Economics - Opleiding tot Registercontroller (EMFC)
2
Management Accounting & Control
Case: The Classic Pen Company
Solution
Prof. Dr. Filip Roodhooft
School of Business and Economics - Opleiding tot Registercontroller (EMFC)
3
Contents
1. Costs estimated in a Traditional Costing System
2. Costs estimated using ABC
3. Conclusions from the revised cost estimates
Att. 1: Cost per unit for each cost object
Att. 2: Definitions of activities
School of Business and Economics - Opleiding tot Registercontroller (EMFC)
4
Direct costs
Indirect costs
Direct material
Direct labor
Cost object
Black, blue, red and purple pens
50,230
Cost Pools
CP1: Overhead Direct Labor x 3
Allocation Base
1. Costs estimated in a Traditional Costing System
20,000
Blue Black Red Purple Total
Prod.sales volume
Sales
Direct material
Direct labor
Indirect labor
Total oper. income
Return on sales
50,000
75,000
25,000
10,000
30,000
10,000
13,3%
40,000
60,000
20,000
8,000
24,000
8,000
13,3%
9,000
13,950
4,680
1,800
5,400
2,070
14,8%
1,000
1,650
550
200
600
300
18,2%
100,000
150,600
50,230
20,000
60,000
20,370
13,5%
School of Business and Economics - Opleiding tot Registercontroller (EMFC)
5
2. Costs estimated using ABC (1/3)Direct costs
Indirect costs
Direct material
Direct labor
Cost object
Black, blue, red and purple pens
50,230
Activities
Activ.1: SchedulingActiv 2: Physical changeoverActiv 3: Keeping recordsActiv 4: Assembly
# runs# set-up hours# products# machine hours
Activity Cost Drivers
28,000
22,00011,2004,800
14,000
150526
410,000
School of Business and Economics - Opleiding tot Registercontroller (EMFC)
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2. Costs estimated using ABC (2/3)
Activities and activity expenses
Activity cost driver rate
School of Business and Economics - Opleiding tot Registercontroller (EMFC)
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2. Costs estimated using ABC (3/3)Activity-Based Costing Product Profitability report
School of Business and Economics - Opleiding tot Registercontroller (EMFC)
8
3. Conclusions from the revised cost estimate• Cost management:
– cost of activities– activity drivers– outsourcing– investment in new machine
• Pricing strategy:– taking into account price elasticity
• Stop – taking into account opportunity costs
School of Business and Economics - Opleiding tot Registercontroller (EMFC)
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Att.1: Cost per unit for each cost object
School of Business and Economics - Opleiding tot Registercontroller (EMFC)
10
Att.2: Definitions of activities• Scheduling:
– scheduling production orders, purchasing, preparing, and releasing materials for the production run; performing a first-item inspection every time the process was changed over, and some scrap loss at the beginning of each run until the process settled down
• Physical changeover:– physical changeover from one color pen to another
• Keeping records:– maintaining records on the four products; including BOM and routing info,
monitoring and maintaining a minimum supply of raw materials and finished goods inventory for each product, improving the production process, and performing engineering changes for the product
• Assembly:– supply machine capacity to product the pens
