FAC 502 – ASSIGNMENT 1

Submitted By: Shubham Tetu

Roll No.: 1910120036

Classic Pen Company: Developing an ABC Model

Q1. Calculate the revised product costs for the four pens, based on the activity information
collected by Dempsey.

Below are the activities in consideration:

1. Production Run: This involves scheduling or handling production runs which included
scheduling production orders, purchasing, preparing & releasing materials for the
production run, first item inspection & scrap loss.
2. Setup: This involves the physical changeover from one color pen to another.
3. Admin Activities (Record Keeping): This involves maintaining records on the four
products, including the bill of materials and routing information, monitoring and
maintaining a minimum supply or raw materials & finished goods inventory for each
product, improving the product processes & performing engineering changes for the
products.
4. Support Activities: Incurred to supply machine capacity to produce the pens (involves 3
expense i.e. machine depreciation, machine maintenance & energy to operate the
machines).
5. Fringe Benefits of direct labour: Fringe benefits provided to the direct labors.

Cost Pool

Several costs could be pooled together as follows:

Activity Expense

Since we know various activities, we can find the expense involved per activity, the same is
represented as follows:

Expense Category Expense Production Run Setup Admin (Record Keeping) Support DL Fringe Benefits
Indirect Labour(including fringe benefits)
28000 14000 11200 2800
Fringe Benefits 8000 8000
Computer Systems 10000 8000 2000
Machine Expense 14000 14000
Total 60000 22000 11200 4800 14000 8000

Activity Cost Driver

We can calculate the cost driver rate of various activities as per given data, as follows:
Now basis above data we can calculate the activity cost for various pens, as follows:
Pen Activity Cost Driver Sales VolumeCost Driver Rate
Cost Driver QuantityExpense
Blue Production Run Production Runs 50000 146.666667 50 7333.333333
Setup Total Setup Time 50000 21.2927757 200 4258.555133
Admin (Record Keeping)Parts Administration 50000 1200 1 1200
Support Machine Hours 50000 1.4 0.1 7000
DL Fringe Benefits Direct Labour Hours 50000 4 0.02 4000
Black Production Run Production Runs 40000 146.666667 50 7333.333333
Setup Total Setup Time 40000 21.2927757 50 1064.638783
Admin (Record Keeping)Parts Administration 40000 1200 1 1200
Support Machine Hours 40000 1.4 0.1 5600
DL Fringe Benefits Direct Labour Hours 40000 4 0.02 3200
Red Production Run Production Runs 9000 146.666667 38 5573.333333
Setup Total Setup Time 9000 21.2927757 228 4854.752852
Admin (Record Keeping)Parts Administration 9000 1200 1 1200
Support Machine Hours 9000 1.4 0.1 1260
DL Fringe Benefits Direct Labour Hours 9000 4 0.02 720
Purple Production Run Production Runs 1000 146.666667 12 1760
Setup Total Setup Time 1000 21.2927757 48 1022.053232
Admin (Record Keeping)Parts Administration 1000 1200 1 1200
Support Machine Hours 1000 1.4 0.1 140
DL Fringe Benefits Direct Labour Hours 1000 4 0.02 80

Activity Based Income Statement

Now basis above data, we can calculate the revised product cost, as follows:

Particulars Blue Black Red Purple Total

Sales 75000 60000 13950 1650 150600
Material Costs 25000 20000 4680 550 50230
Direct Labour 10000 8000 1800 200 20000
Overhead
Production Run 7333.333 7333.333 5573.333 1760 22000
Setup 4258.555 1064.639 4854.753 1022.053 11200
Admin (Record Keeping) 1200 1200 1200 1200 4800
Support 7000 5600 1260 140 14000
DL Fringe Benefits 4000 3200 720 80 8000
Net Cost 58791.89 46397.97 20088.09 4952.053 130230
Total Operating Income 16208.11 13602.03 -6138.09 -3302.05 20370
Return on sales 0.216108 0.2267 -0.44001 -2.00124 0.135259

Revised Cost
 Particulars Blue Black Red Purple Total
Revised Cost $58,791.89 $46,397.97 $20,088.09 $4,952.05 $130,230.00

Q2. Your recommendation

 As per “Activity Based Income Statement”, Red and Purple pens were sold at very low
price as compared to the cost price of each pen. As the productions charges were very
high company is not generating profit.
We can compare the cost and selling price as per below table.

Particulars Blue Black Red Purple

Cost Price $1.18 $1.16 $2.23 $4.95
Selling Price $1.50 $1.50 $1.55 $1.65
Difference $0.32 $0.34 -$0.68 -$3.30

 As per above table , we could recommend to: “Increase selling price of Red & Purple pens.”