1. Solutions Classic Pen Company

2. Management Accounting & Control Case: The Classic Pen Company
Solution
Prof. Dr. Filip Roodhooft

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

4. 1. Costs estimated in a Traditional Costing System
Direct costs
Cost object
Black, blue, red and purple pens
Direct material
50,230
Direct labor
20,000
Allocation Base
Indirect costs
Cost Pools
Direct Labor x 3
CP1: Overhead
Blue
Black
Red
Purple
Total
Prod.sales volume
50,000
40,000
9,000
1,000
100,000
Sales
75,000
60,000
13,950
1,650
150,600
Direct material
25,000
20,000
4,680
550
50,230
Direct labor
10,000
8,000
1,800
200
20,000
Indirect labor
30,000
24,000
5,400
600
60,000
Total oper. income
10,000
8,000
2,070
300
20,370
Return on sales
13,3%
13,3%
14,8%
18,2%
13,5%

5. 2. Costs estimated using ABC (1/3)
Direct costs
Cost object
Black, blue, red and purple pens
Direct material
50,230
Direct labor
28,000
Activity Cost Drivers
Indirect costs
Activities
22,000
11,200
4,800
14,000
# runs
# set-up hours
# products
# machine hours
Activ.1: Scheduling
Activ 2: Physical changeover
Activ 3: Keeping records
Activ 4: Assembly
150
526 4
10,000

6. 2. Costs estimated using ABC (2/3)
Activities and activity expenses
Activity cost driver rate

7. 2. Costs estimated using ABC (3/3)
Activity-Based Costing Product Profitability report

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

9. Att.1: Cost per unit for each cost object

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