Solutions Classic Pen Company

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

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

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%

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

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

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

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

Att.1: Cost per unit for each cost object

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