Classic Pen Company

Problem
Low Profitability
Pricing of the Pens
Longer changeover time for Red & Purple
Indirect Cost allocated based on Direct Labour
Burden Rate 200% - 300% :: Increased Overhead

Low Price

Blue Black Red

Blue
Sale Price 1.50
Less:
Material Cost 0.50
Labour Cost 0.20
Contribution 0.80
No of Units 50,000
Weighted Contribution

Break Even Point

More the Complecation in the process or more the
Overheads will be higher

Bill of Material - List of Direct Material & Direct L

The above documents helps to find the Variable C

Similar information is not available for Overheads,
Total Overhead Cost / Any Suita

Kaplan introduced a System where overhead are ca

Every Indirect Activity is captured and

Activity to be identified to each product

Cost of specific activity should be allocated

Cost Driver means the unit of measurement

Computer System
Energy, Maintenance
Cleaning of Tank
Consumable material for Cleaning of Tank
 Overhead
Indirect Labour

Fringe Benefits PF, ESI, Tea, Lunch

Computer Systems

Machinery
Maintenance
Energy

Cost Driver Number of production Run [Number of Batches]

Activities 50% working in Scheduling - Planning - Indirect La
Activities 50% working in Scheduling - Planning - Fringe Ben
Activities 80% in Production Run - Computer Systems Cost

Base Blue
Production Runs 50
8,667

Cost Driver Set up time

Activities 40% working in Scheduling - Planning - Indirect La
Activities 40% working in Scheduling - Planning - Fringe Ben

Base Blue
Set up Time 200
5,475

Cost Driver Parts Admin

Activities 10% working in Scheduling - Planning - Indirect La
Activities 10% working in Scheduling - Planning - Fringe Ben
Activities 20% in Production Run - Computer Systems Cost

Base Blue
Parts Admin 1
1,400

Machine Hours Machinery 8,000

Maintenance 4,000
Energy 2,000
14,000

Base Blue
Machine Hours 5,000
 7,000

Contribution per Product

Number of Units Sold
Total Contribution
Allocated Overheads
Production Run
Set up Hours
Machine Hours
Parts Admin

Net Profit
Sale Value
Red & Purple
on Direct Labour
ncreased Overhead

Low Profitability - Profit Percentage

Higher Overhea

Purple Moulding
Colour Mixing for Ink

Black Red Purple

1.50 1.55 1.65

0.50 0.52 0.55

0.20 0.20 0.20
0.80 0.83 0.90
40,000 9,000 1,000
0.80

60,000 74,655
he process or more the high end machines used in process,

ct Material & Direct Labour Hours required & Critical Consumables

to find the Variable Cost per Unit

ailable for Overheads, hence Burden Rate is followed
head Cost / Any Suitable Base
Direct Labour Hours
Machine Running Hours
Direct Labour Cost
Material Cost

where overhead are captured for each cost unit

ctivity is captured and linked to number of units processed or produ

ed to each product Cost Driver

y should be allocated specific to that product

unit of measurement which drives the cost of particular of Activity

Cost Drivers
puter System Number of Computer hours spent for each product
gy, Maintenance Number of Machine Hours Running
ning of Tank Number of Hours spent for cleaning for each produc
aning of Tank Quantity consumed for each product
 Activity
50% working in Scheduling - Planning
40% working in physical changeover - Material Hand
10% working in Documents - Admin
a, Lunch 50% working in Scheduling - Planning
40% working in physical changeover - Material Hand
10% working in Documents - Admin
80% in Production Run
20% in Records Keeping - Admin

Number of Machine Hours Running

Number of Batches]
Planning - Indirect Labour 20,000 X 50% = 10,000
Planning - Fringe Benefits 16,000 X 50% = 8,000
mputer Systems Cost 10,000 X 80% = 8,000
26,000

Black Red Purple

50 38 12
8,667 6,587 2,080

Planning - Indirect Labour 20,000 X 40% = 8,000

 Planning - Fringe Benefits 16,000 X 40% = 6,400
14,400

Black Red Purple

50 228 48
1,369 6,242 1,314

Planning - Indirect Labour 20,000 X 10% = 2,000

Planning - Fringe Benefits 16,000 X 10% = 1,600
mputer Systems Cost 10,000 X 20% = 2,000
5,600

Black Red Purple

1 1 1
1,400 1,400 1,400

Black Red Purple

4,000 900 100
 5,600 1,260 140

Blue Black Red Purple

0.80 0.80 0.83 0.90
50,000 40,000 9,000 1,000
40,000 32,000 7,470 900

8,667 8,667 6,587 2,080

1,369 5,475 6,242 1,314
5,600 7,000 1,260 140
1,400 1,400 1,400 1,400 60,000

22,965 9,458 (8,018) (4,034)

60,000 75,000 13,950 1,650
38% 13% -57% -244%
gher Overhead

Single Machine
ixing for Ink Single Machine Multiple Machine
onsumables

ssed or produced

st Driver

r of Activity

ach product

r each product
 Cost Driver
Number of production Run [Nu
Material Handling Set up time / Run
Parts Admin - Inventory Manag
Number of production Run [Nu
Material Handling Set up time / Run
Parts Admin - Inventory Manag
Number of production Run [Nu
Parts Admin - Inventory Manag

Machine Hours

150
26,000
 526
14,400

4
5,600

10000
14,000
achine
ction Run [Number of Batches]

entory Management
ction Run [Number of Batches]

entory Management
ction Run [Number of Batches]
entory Management