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    The Classic Pen Company - Group 2

    Uploaded by

    Imelda Hotmaria
    The Classic Pen Company produces blue and black pens in a single factory. It is looking to introduce red and purple pens, which require more setup time and scheduling activities. Currently, the company uses a traditional costing system. To better understand the costs of the new pens, the company decides to implement an activity-based costing (ABC) system. The ABC analysis reveals that the red and purple pens have higher indirect costs than estimated. This leads the company to consider two alternatives: 1) stop producing the red and purple pens or 2) adjust their prices to cover variable costs. Adjusting the prices is identified as the more profitable approach if competitors' prices are higher.

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    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd

    The Classic Pen Company - Group 2

    Uploaded by

    Imelda Hotmaria
    89 views23 pages
    The Classic Pen Company produces blue and black pens in a single factory. It is looking to introduce red and purple pens, which require more setup time and scheduling activities. Currently, the company uses a traditional costing system. To better understand the costs of the new pens, the company decides to implement an activity-based costing (ABC) system. The ABC analysis reveals that the red and purple pens have higher indirect costs than estimated. This leads the company to consider two alternatives: 1) stop producing the red and purple pens or 2) adjust their prices to cover variable costs. Adjusting the prices is identified as the more profitable approach if competitors' prices are higher.

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    © © All Rights Reserved

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    The Classic Pen Company produces blue and black pens in a single factory. It is looking to introduce red and purple pens, which require more setup time and scheduling activities. Currently, the company uses a traditional costing system. To better understand the costs of the new pens, the company decides to implement an activity-based costing (ABC) system. The ABC analysis reveals that the red and purple pens have higher indirect costs than estimated. This leads the company to consider two alternatives: 1) stop producing the red and purple pens or 2) adjust their prices to cover variable costs. Adjusting the prices is identified as the more profitable approach if competitors' prices are higher.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    89 views23 pages

    The Classic Pen Company - Group 2

    Uploaded by

    Imelda Hotmaria
    The Classic Pen Company produces blue and black pens in a single factory. It is looking to introduce red and purple pens, which require more setup time and scheduling activities. Currently, the company uses a traditional costing system. To better understand the costs of the new pens, the company decides to implement an activity-based costing (ABC) system. The ABC analysis reveals that the red and purple pens have higher indirect costs than estimated. This leads the company to consider two alternatives: 1) stop producing the red and purple pens or 2) adjust their prices to cover variable costs. Adjusting the prices is identified as the more profitable approach if competitors' prices are higher.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 23

    The

    Classic Pen Company


    Bambang Tri Sukoco (2006555106)
    Firda Farida (1906417621)
    Garry Christ Himawan (1906417640)
    Mochammad Kiky Noviar (1906421474)
    TABLE OF CONTENTS

    01 02
    OVERVIEW ANALYSIS
    • About Company
    1. Cost estimation based on
    • Operation
    ABC
    • Activity-Based Costing
    2. Managerial implications
    • Company’s Issues
    01
    OVERVIEW
    • About Company
    • Operation
    • Activity-Based Costing
    • Company’s Issues
    ABOUT THE COMPANY
    Jane Dempsey
    Controller of
    Classic Pen Low-cost producer

    Traditional Blue & Black Pen


    Profit margin: 20%

    New line production:


    Red & Purple Pen
    OPERATION

    Produced pens in Routing sheet (Sequence


    single factory of Production):
    Direct Labor

    Major Task:
    Preparing & mixing ink Indirect cost:
    for different color pen Plant level  DLH

    Bill of Material
    Overhead burden rate:
    for each product:
    300% of DL
    Direct Material
    ACTIVITY-BASED COSTING
    Indirect Labor
    • 50%  Handling & scheduling
    • 40%  Setup costs
    • 10%  Maintaining records

    Computer Expenses
    • 80%  Production run
    • 20%  Record keeping

    Support Activities
    • Machine
    • Machine Maintenance
    • Energy
    COMPANY’S ISSUES

    Red & purple pens seem more profitable, but


    1 overall margin is falling

    2 Process for red & purple pens require more


    set up time

    3 Much time spent on scheduling &


    purchasing activities
    02
    ANALYSIS
    1. Cost estimation based on ABC
    2. Managerial implications
    Q1
    Cost Estimation
    Based on ABC
    BREAKDOWN OF
    THE COSTS
    STEPS IN ABC CALCULATION

    Select activities
    3 and cost allocation
    bases

    2
    Identify the
    direct costs

    4
    Identify the
    indirect costs

    Identify the
    products 1
    Calculate
    total cost of
    the products
    7

    Calculate the
    indirect cost 6 Calculate rate/unit
    5
    allocated to the
    products of each allocation
    cost-based activity
    ABC
    CALCULATION
    NEW INCOME STATEMENT
    Q2
    Managerial
    Implications
    (Alternatives)
    ALTERNATIVES

    Stop Selling Red &


    Purple Pen

    Adjust the Price of


    Red and Purple Pen
    Alternative 1
    There will be idle capacity from machine
    hour and increase in the operating income
    at the same time.
    1

    Stop Selling Red &


    Purple Pen

    Classic Pen can reduce costs by increasing


    the quantity of Red & Purple Pens, but it
    needs to be based on increased demand.
    Profit & Loss Before After
    Alternative 1 Sales 150.600 135.000
    Material Costs 50.230 45.000
    Direct Labor 20.000 18.000
    Indirect Cost Type of Resources Effect Overhead Cost 60.000 43.390
    Indirect Labor Indirect Labor
    1. Handling and Scheduling Flexible Decrease 1. Handling and Scheduling 10.000 6.667
    2. Setup for Change Color Flexible Decrease 2. Setup for Change Color 8.000 3.802
    3. Maintainning records & etc Flexible Decrease 3. Maintainning records & etc 2.000 1.000
    Fringe Benefits Fringe Benefits
    1. Fringe Related Direct Labor Flexible Decrease 1. Fringe Related Direct Labor 8.000 7.200
    2. Fringe Related Indirect Labor Flexible Decrease 2. Fringe Related Indirect Labor 8.000 4.588
    Computer Systems Computer Systems
    1. Schedule production run Flexible Decrease 1. Schedule production run 8.000 5.333
    2. Maintainning records Flexible Decrease 2. Maintainning records 2.000 1.000
    Machinery Depreciation Commited Unchanges Machinery Depreciation 8.000 8.000
    Maintenance Activity Commited Unchanges Maintenance Activity 4.000 4.000
    Machinery Power Flexible Decrease Machinery Power 2.000 1.800
    Operating Income 20.370 28.610
    OPM 13,5% 21,2%
    ALTERNATIVE 2

    Adjust the Price of Minimizing changing 1


    Red and Purple Pen color process
    (Reduce Setup Times
    376 hours 150 hours)

    Offering minimum
    2
    price = variable cost
    of Purple & Red Pens
    ALTERNATIVE 2

    Red Purple
    Minimum Price 1,75 4,36
    Material Costs 4.680 550 Alternative 2 Blue Black Red Purple Total
    Direct Labor 1.800 200 Sales 75.000 60.000 15.774 4.365 155.139
    Variable Indirect Cost 9.294 3.615 Material Costs 25.000 20.000 4.680 550 50.230
    Variable Cost 15.774 4.365 Direct Labor 10.000 8.000 1.800 200 20.000
    Quantity 9.000 1.000 Overhead (ABC) 21.646 19.446 10.374 3.735 55.200
    Variable Cost/Unit 1,75 4,36 Total Operating Income 18.354 12.554 - 1.080 - 120 29.709
    Return on Sales 24,5% 20,9% -6,8% -2,7% 19,1%
    SUMMARY

    • Alternative 1  if the competitors sell similar products


    (Purple & Red Pen) at the same price  impossible to
    increase the price.

    • Alternative 2  if the price set by competitor is higher than


    price at Classic Pen, or there are no similar products (Purple
    & Red Pen) in the market  flexible price for Classic Pen.

    • Alternative 2 is more profitable for Classic Pen, if the


    minimum price offered in Alternative 2 is accepted 
    Estimated operating income: $ 29.709
    THANK
    YOU
    THANKS
    CREDITS: This presentation template was created by
    Slidesgo, including icons by Flaticon, and infographics &
    images by Freepik
    REFERENCES

    ● Atkinson, Anthony A., Kaplan, Robert S., Matsumura, Ella


    Mae and Young, S. Mark. (2012). Management Accounting;
    Information for Decision Making and Strategy Execution,
    6th edition. New Jersey: Pearson.

    ● Kaplan, Robert S. (1997). The Classic Pen Company.


    Harvard Business School. 198-117.

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