Classic Pen Case Analysis

CLASSIC PEN COMPANY: DEVELOPING AN ABC MODEL
REVISED PRODUCT COSTS FOR THE FOUR PENS, BASED ON THE ACTIVITY INFORMATION COLLECTED BY DEMPSEY

Cost centres under ABC
Indirect labour=$ 20,000 40% *20,000=8,000
Total indirect labour=$ 28,000
Computer expenses=$ 10,000
Machine expenses= $ 8,000+ $ 4,000+ $ 2,000=$ 14,000
Cost estimates/allocation under ABC
Activity Indirect labour Computer expenses Machine expenses 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% 14,000 14,000 1000 1.4
Total 28,000 10,000 14,000 52,000

Resource costs to activities (ABC cost sheet Blue Black Red Purple Total 50,000 40,000 9,000 1,000 100,000
Direct material 25,000 20,000 4,680 550 50,230
Direct labour 10,000 8,000 1,800 200 20,000
40% of fringe benefits 4,000 3,200 720 80 8,000
Overheads
Machine support 7,000 5,600 1,260 140 1,4000
Production run expenses 7,333 7,333 5,573 1,760 22,000
Set up expenses 4,259 1,065 4,855 1,022 11,200
Administrative expenses 1,200 1,200 1,200 1,200 4,800
Total overheads 19,792 15,198 12,888 4,122 52,000
Total cost 58,792 46,398 20,088 4,952 130,230
Cost per unit 1.18 1.16 2.23 4.95
Sales 75,000 60,000 13,950 1,650 150,600 1.5 1.5 1.55 1.65 profit 16,208 13,602 -6,138 -3,302 20,370
Profit per unit 0.32 0.34 -0.68 -3.30
Profit margin 22% 23% -44% -200% 14%

Workings Blue
Set up expenses=200/526*11200=4,258.5
Production run