Solutions Classic Pen Company
2
Management Accounting & Control
Case: The Classic Pen Company
Solution
Prof. Dr. Filip Roodhooft
School of Business and Economics - Opleiding tot Registercontroller (EMFC)
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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)
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1. Costs estimated in a Traditional Costing System
Direct costs
Cost object
Direct material
50,23
0
Direct labor
20,00
0
Black, blue, red
and purple pens
Allocation Base
Cost Pools
Indirect costs
Direct Labor x 3
CP1: Overhead
Blue
Black
Red
Purple
Total
50,000
75,000
40,000
60,000
9,000
13,950
1,000
1,650
100,000
150,600
20,000
8,000
24,000
8,000
4,680
Direct labor
Indirect labor
Total oper. income
25,000
10,000
30,000
10,000
1,800
5,400
2,070
550
200
600
300
50,230
20,000
60,000
20,370
Return on sales
13,3%
13,3%
14,8%
18,2%
13,5%
Prod.sales volume
Sales
Direct material
School of Business and Economics - Opleiding tot Registercontroller (EMFC)
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2. Costs estimated using ABC
(1/3)
Direct costs
Cost object
Direct material
50,23
0
Direct labor
28,00
0
Indirect costs
Black, blue, red
and purple pens
Activities
Activ.1: Scheduling
Activ 2: Physical changeover
Activ 3: Keeping records
Activ 4: Assembly
22,000
11,200
4,800
14,000
Activity Cost Drivers
# runs
150
# set-up hours
526
# products
4
# machine hours 10,000
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)
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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)
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
School of Business and Economics - Opleiding tot Registercontroller (EMFC)
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