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    Classic Pen Company Scribd

    Uploaded by

    Madhur Bangur
    This document summarizes the financial information of Classic Pen Company which produces pens in four colors: blue, black, red, and purple. It shows the traditional income statement using absorption costing which allocates overhead based on direct labor costs. It then introduces activity-based costing (ABC) which identifies three activities - production run, set up, and parts administration - and allocates costs to each activity. The ABC income statement reallocates costs more accurately and shows that red and purple pens are less profitable than under absorption costing. A cost comparison table demonstrates that ABC cost per unit is different for each color compared to the original absorption costing method.

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    © All Rights Reserved
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    Classic Pen Company Scribd

    Uploaded by

    Madhur Bangur
    262 views8 pages
    This document summarizes the financial information of Classic Pen Company which produces pens in four colors: blue, black, red, and purple. It shows the traditional income statement using absorption costing which allocates overhead based on direct labor costs. It then introduces activity-based costing (ABC) which identifies three activities - production run, set up, and parts administration - and allocates costs to each activity. The ABC income statement reallocates costs more accurately and shows that red and purple pens are less profitable than under absorption costing. A cost comparison table demonstrates that ABC cost per unit is different for each color compared to the original absorption costing method.

    Original Description:

    Classic Pen Company case solution

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    This document summarizes the financial information of Classic Pen Company which produces pens in four colors: blue, black, red, and purple. It shows the traditional income statement using absorption costing which allocates overhead based on direct labor costs. It then introduces activity-based costing (ABC) which identifies three activities - production run, set up, and parts administration - and allocates costs to each activity. The ABC income statement reallocates costs more accurately and shows that red and purple pens are less profitable than under absorption costing. A cost comparison table demonstrates that ABC cost per unit is different for each color compared to the original absorption costing method.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    262 views8 pages

    Classic Pen Company Scribd

    Uploaded by

    Madhur Bangur
    This document summarizes the financial information of Classic Pen Company which produces pens in four colors: blue, black, red, and purple. It shows the traditional income statement using absorption costing which allocates overhead based on direct labor costs. It then introduces activity-based costing (ABC) which identifies three activities - production run, set up, and parts administration - and allocates costs to each activity. The ABC income statement reallocates costs more accurately and shows that red and purple pens are less profitable than under absorption costing. A cost comparison table demonstrates that ABC cost per unit is different for each color compared to the original absorption costing method.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    of 8

    Classic Pen

    Company

    Case Background
    Five years earlier
    Red pens were
    introduced at 3%
    premium
    Recently Purple pens
    were introduced at
    10% premium.

    All indirect costs were


    aggregated at plant
    level and allocated to
    products based upon
    the direct labor cost
    The overhead rate is
    300% of direct labor
    cost

    Current Financials
    Income statement

    Blue

    Black

    Sales

    $75,000

    $60,000

    Material costs

    $25,000

    Direct labour

    Purple

    Total

    $13,950

    $1,650

    $150,600

    $20,000

    $4,680

    $550

    $50,230

    $10,000

    $8,000

    $1,800

    $200

    $20,000

    Overhead @300%

    $30,000

    $24,000

    $5,400

    $600

    $60,000

    Total operating cost

    $65,000

    $52,000

    $11,880

    $1,350

    $130,230

    Total operating income

    $10,000

    $8,000

    $2,070

    $300

    $20,370

    13.33%

    13.33%

    14.84%

    18.18%

    13.53%

    Return on sales

    Red

    By ABC
    Fringe Benefits

    Computer
    Expenses
    Support

    Direct labour (50%)


    Indirect labor (50%)
    50% : Production run
    40% : Setup costs
    10% : Parts Administration
    20% : Parts adminstration
    80% : Production run
    is appropriated as produced
    quantity

    Calculation
    Activities

    Cost

    Explanation

    Production Run

    $22,000

    $8,000 (Computer System)


    $10,000 (Indirect Labour)
    $4,000 (Fringe)

    Set up

    $11,200

    $8,000 (Indirect Labour)


    $3,200 (Fringe)

    Parts Administration

    $4,800

    $2,000 (Computer System)


    $2,000 (Indirect Labour)
    $800 (Fringe)

    Income Statement with ABC

    Blue

    Black

    Red

    Purple

    Total

    Sales

    $75,000

    $60,000

    $13,950

    $1,650

    $150,600

    Material costs

    $25,000

    $20,000

    $4,680

    $550

    $50,230

    Direct labour

    $10,000

    $8,000

    $1,800

    $200

    $20,000

    Production Run

    $7,333

    $7,333

    $5,573

    $1,760

    $22,000

    Set up

    $4,259

    $1,065

    $4,855

    $1,022

    $11,200

    Parts Administration

    $1,200

    $1,200

    $1,200

    $1,200

    $4,800

    Support

    $7,000

    $5,600

    $1,260

    $140

    $14,000

    Direct labour fringe

    $4,000

    $3,200

    $720

    $80

    $8,000

    Total Overhead

    $23,792

    $18,398

    $13,608

    $4,202

    $60,000

    Operating income

    $16,208

    $13,602

    ($6,138)

    ($3,302)

    $20,370

    21.6%

    22.7%

    -44.0%

    -200.1%

    13.5%

    Return on sales

    Cost Comparison

    Blue

    Black

    Red

    Purple

    Original
    Cost/unit

    $1.30

    $1.30

    $1.32

    $1.35

    ABC cost/unit

    $1.17

    $1.15

    $2.23

    $4.95

    THANK YOU!

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