Classic Pen Company

THE CLASSIC PEN COMPANY
Activity Based Costing case study

Topics
• About The Classic Pen Company
• Issues
• ABC introduction at TCPC

• Managerial implications
• Recommendations
School of Business and Economics - Opleiding tot Registercontroller (EMFC)

About
• Classic Pen Company is a low cost provider of traditional BLUE and BLACK pens
• High profit margins (over 20% of sales)
• Cost allocated on basis of traditional cost price method • Introduction of new colors (RED and PURPLE could be sold at 3% premium)
• Expectations: higher profit margins
• Realization: Lower profitability

School of Business and Economics - Opleiding tot Registercontroller (EMFC)

Issues
• By expanding the assortment, with premium models, higher results on sales were realized, but overall profitability was declining
• Allocation of 300% overhead via direct labour  hard to maintain
EXHIBIT 1

Traditional Income Statement

Sales
Material costs
Direct labor
Overhead @ 300%
Total operating income
Return on sales

BLUE
BLACK
RED
PURPLE
TOTAL
$ 75.000 $ 60.000 $ 13.950 $ 1.650 $ 150.600
25.000
20.000
4.680
550
50.230
10.000
8.000
1.800
200
20.000
30.000
24.000
5.400
600
60.000
$ 10.000 $ 8.000 $ 2.070 $
300 $ 20.370
13,3%
13,3%
14,8%
18,2%
13,5%

School of Business and Economics - Opleiding tot Registercontroller (EMFC)

Activity based costing analysis
EXPENSE CATEGORY

Overhead

EXHIBIT 2

Indirect labor
Fringe benefits
Computer systems
Machinery
Maintenance
Energy
Total

EXPENSE
20.000
16.000
10.000
8.000
4.000
2.000
60.000

Direct Costs and Activity Cost Drivers

Production sales volumes (no. of units)
Unit selling price
Material/unit cost
Direct labor hr/unit
Machine hour/unit
No. of production runs
Setup time/run (hours)
Total setup time (hours)
Number of products

BLUE
BLACK
RED
PURPLE TOTAL
50.000
40.000
9.000
1.000
100.000
$1,50
$0,50
0,02
0,1
50
4
200
1