ABC Classic Pen company case

1. CLASSIC PEN COMPANY

2. SUMMARY BACKGROUND
Produced 2 Pens- Blue & Black.
Started Producing Red and Purple Pens As Well.
The Profits Started to Decrease With the
Introduction of 4 Colors.
All pens produced in one factory.
Ink is filled in the pens after the colors are
mixed. This makes machinery to be cleaned during
transition from one color to another.
Currently applies overhead on the basis of direct
labor cost.

3. Income Statement
Blue
Black
Red
Purple
Total
Sales
75.000
60.000
13.950
1.650
150.600
Direct Materials
25.000
20.000
4.680
550
50.230
Direct Labor
10.000
8.000
1.800
200
20.000
Manufacturing Overhead
30.000
24.000
5.400
600
60.000
Total Manufacturing Costs
65.000
52.000
11.880
1.350
130.230
Gross Margin
10.000
8.000
2.070
300
20.370
Gross Margin %
13,33%
13,33%
14,84%
18,18%
Unit Product Cost
1,30
1,30
1,32
1,35
Production in Units
50.000
40.000
9.000
1.000
Applied OH %300 of direct labor cost
13,53%

4. Activities and Activity Rates
Activity
Measure
Production Planning
# of Process
Color Transition
Prep Time
Bookkeeping
# of products
Information Center
# of Process
Machinery, Energy and Maintenance
Machine Hours
Invoicing and Shipping
# of products

5. First Stage Allocation
Activity
Overhead
Measure
Consumption
Production Planning
# of Process
30,00%
Color Transition
Prep Time
24,00%
Bookkeeping
# of products
Information Center
# of Process
13,33%
Machinery, Energy and Maintenance
Machine Hours
23,33%
Invoicing and Shipping
# of products
3,33%
6,00%
Activity
Total
Measure
Activity
Production Planning
# of Process
150
Color Transition
Prep Time
526
Bookkeeping
# of products
Information Center
# of Process
Machinery, Energy and Maintenance
Machine Hours
Invoicing and Shipping
# of products
Blue
Production in Units
Machine Hours Required/unit
# of Process
Prep Time/unit
Black
50.000
40.000
100.000
150
10.000
100.000
Red
Purple
9.000
1.000
0,1
0,1
0,1
0,1
50
50
38
12
200
50
228
48

6. First Stage Allocation
Activity
Rates
Overhead
Consumption
Overhead
Costs
Production Planning
# of Process
30,00%
18.000
Color Transition
Prep Time
24,00%
14.400
Bookkeeping
# of products
6,00%
3.600
Information Center
# of Process
13,33%
8.000
Machinery, Energy and Maintenance
Machine Hours
23,33%
14.000
Invoicing and Shipping
# of products
3,33%
2.000
Total
60.000

7. Activity Rates
Activity
Total
Measure
Activity
Production Planning
# of Process
150
Color Transition
Prep Time
526
Bookkeeping
# of products
Information Center
# of Process
Machinery, Energy and Maintenance
Machine Hours
Invoicing and Shipping
# of products
100.000
150
10.000
100.000

8. Activity Rates
Activity
Total
Overhead
Activity
Measure
Activity
Costs
Rates
Production Planning
# of Process
150
18.000
Color Transition
Prep Time
526
14.400
Bookkeeping
# of products
100.000
3.600
Information Center
# of Process
150
8.000
53,33
Machinery, Energy and Maintenance
Machine Hours
10.000
14.000
1,40
Invoicing and Shipping
# of products
100.000
2.000
Total
60.000
120
27,38
0,04
0,02

9. Second Stage Allocation
Blue
Production in Units
Machine Hours Required/unit
# of Process
Prep Time/unit
Black
50.000
40.000
Red
Purple
9.000
1.000
0,1
0,1
0,1
0,1
50
50
38
12
200
50
228
48

10. Second Stage Allocation
Blue
Black
Production Planning
6.000,00
6.000,00
4.560,00
1.440,00
Color Transition
5.475,29
1.368,82
6.241,83
1.314,07
Bookkeeping
1.800,00
1.440,00
324,00
36,00
Information Center
2.666,67
2.666,67
2.026,67
640,00
Machinery, Energy and Maintenance
7.000,00
5.600,00
1.260,00
140,00
Invoicing and Shipping
1.000,00
800,00
180,00
20,00
23.941,95
17.875,49
14.592,49
3.590,07
Total
Blue
Production in Units
Black
50.000
Machine Hours Required/unit
# of Process
Prep Time/unit
40.000
Red
Purple
Red
Purple
9.000
1.000
0,1
0,1
0,1
0,1
50
50
38
12
200
50
228
48
Activity
Activity
Measure
Rates
Production Planning
# of Process
Color Transition
Prep Time
Bookkeeping
# of products
Information Center
# of Process
Machinery, Energy and Maintenance
Machine Hours
Invoicing and Shipping
# of products
Total
120
27,38
0,04
53,33
1,40
0,02

11. Product Costing
Blue
Black
Red
Purple
Total
Sales
75.000
60.000
13.950
1.650
150.600
Direct Materials
25.000
20.000
4.680
550
50.230
Direct Labor
10.000
8.000
1.800
200
20.000
Production Planning
6.000,00
6.000,00
4.560,00
1.440,00
18.000
Color Transition
5.475,29
1.368,82
6.241,83
1.314,07
14.400
Bookkeeping
1.800,00
1.440,00
324,00
36,00
3.600
Information Center
2.666,67
2.666,67
2.026,67
640,00
8.000
Machinery, Energy and Maintenance
7.000,00
5.600,00
1.260,00
140,00
14.000
Invoicing and Shipping
1.000,00
800,00
180,00
20,00
2.000
58.941,95
45.875,49
21.072,49
4.340,07
130.230,00
16.058,05
14.124,51
Overhead
Total Manufacturing Costs
Gross Margin
Gross Margin %
21%
Unit Product Cost
1,18
24%
1,15
(7.122,49) (2.690,07)
-51%
-163%
2,34
20.370,00
14%
4,34
vs Traditional Costing
Gross Margin %
Unit Product Cost
13%
1,30
13%
1,30
15%
1,32
18%
1,35
14%