Classic Pen Co.

: Developing an ABC Model

Harvard Business School Case 198117
Case Software # XLS-666

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Expense Category Expense Direct Lab Indirect Labour
Indirect Labor $20,000 20,000 20000
Fringe Benefits 16,000 Fringe Ben 8000 8000 16000
Computer Systems 10,000
Machinery 8,000
Maintenance 4,000
Energy 2,000
Total $60,000
Expense Expense Handle Part MaCHIN
Category Production Administr E
Runs Setup ation Support
Indirect Labor 28000
including Fringe 14000 11200 2800
Computer 10000
Systems 8000 2000
Machinery 8000 8000
Maintenance 4000 4000
Energy 2,000 2000
Total 52000 22000 11200 4800 14000 52000
# of Setup
Activity Cost Production Time in Machine
Driver Runs Hrs # or Parts Hours
Total Units of
Activity Cost
Driver
Activity Driver 150 526 4 10,000
Rate 146.67 21.29 1200.00 1.40
per
Per Prodn Per Setup Machine Total Direct
Run Hr per part Hour Overhead Material labour
Blue 7333.33 4258.56 1200.00 7000.00 19791.89 25,000.00 14000
Black 7333.33 1064.64 1200.00 5600.00 15197.97 20,000.00 11200
Red 5573.33 4854.75 1200.00 1260.00 12888.09 4,680.00 2520
Purple 1760.00 1022.05 1200.00 140.00 4122.05 550.00 280
22000.00 11200.00 4800.00 14000.00 52000.00 50230.00 28000.00
Total Cost Revenue Profit Profit margin Per Unit Cost
58791.89 75000 16208.11 21.61% 1.18 1.41
46397.97 60000 13602.03 22.67% 1.16 1.39
20088.09 13950 -6138.09 -44.00% 2.23 2.68
4952.05 1650 -3302.05 -200.12% 4.95 5.94
130230.00 150600.00 20370.00 13.53%
Exhibit 1 Traditional Income Statement

Blue Black Red Purple Total

Sales $75,000 $60,000 $13,950 $1,650 $150,600
Material Costs 25,000 20,000 4,680 550 50,230
Direct Labor 10,000 8,000 1,800 200 20,000
Overhead @300% 30,000 24,000 5,400 600 60,000
Total Operating $10,000 $8,000 $2,070 $300 $20,370
Income
Return on Sales 13.6% 13.3% 14.8% 18.2% 13.5%
Exhibit 2 Direct Costs and Activity Cost Drivers

Blue Black Red Purple Total

Production Sales Volume 50,000 40,000 9,000 1,000 100,000
Unit Selling Price $1.50 $1.50 $1.55 $1.65
Materials-unit cost $0.50 $0.50 $0.52 $0.55
Direct labor hrs/unit 0.02 0.02 0.02 0.02 2,000
Machine hours/unit 0.1 0.1 0.1 0.1 10,000
Production runs 50 50 38 12 150
Setup time/run 4 1 6 4
Total setup time (hours) 200 50 228 48 526
Parts administration 1 1 1 1 4
1000 800 236.8421 83.33333