Classic Pen
Classic Pen Case
1. Calculate the revised product costs for the four pens, using the spreadsheet template provided and the information collected by Dempsey. | | 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 (DL) | | $10,000 | $8,000 | $1,800 | $200 | | $20,000 | | | | | | | | | 40% fringe on DL | | $4,000 | $3,200 | $720 | $80 | | $8,000 | | | | | | | | | Machine time expense | | $7,000 | $5,600 | $1,260 | $140 | | $14,000 | | | | | | | | | Production run expense | | $7,333 | $7,333 | $5,573 | $1,760 | | $22,000 | | | | | | | | | Setup time expense | | $4,259 | $1,065 | $4,855 | $1,022 | | $11,200 | | | | | | | | | Administer parts expense | | $1,200 | $1,200 | $1,200 | $1,200 | | $4,800 | | | | | | | | | Total expense | | $58,792 | $46,398 | $20,088 | $4,952 | | $130,230 | | | | | | | | | Operating income | | $16,208 | $13,602 | ($6,138) | ($3,302) | | $20,370 | | | | | | | | | Return on sales | | 22% | 23% | -44% | -200% | | 14% |
2. Why are the results using ABC so different from the original results? Explain.
The difference obtained using ABC as compared to the traditional costing method is primarily due to the fact that in traditional costing, costs of products are calculated using allocated resource bases that are predetermined. In other words it would mean that the total amount of sales is divided by the overall expenses. But with ABC, the cost of a product is calculated using both the activity drivers, which are for example the amount of activity for each activity, and resource drivers which defines how each activity level affect the resource consumption.
1. Calculate the revised product costs for the four pens, using the spreadsheet template provided and the information collected by Dempsey. | | 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 (DL) | | $10,000 | $8,000 | $1,800 | $200 | | $20,000 | | | | | | | | | 40% fringe on DL | | $4,000 | $3,200 | $720 | $80 | | $8,000 | | | | | | | | | Machine time expense | | $7,000 | $5,600 | $1,260 | $140 | | $14,000 | | | | | | | | | Production run expense | | $7,333 | $7,333 | $5,573 | $1,760 | | $22,000 | | | | | | | | | Setup time expense | | $4,259 | $1,065 | $4,855 | $1,022 | | $11,200 | | | | | | | | | Administer parts expense | | $1,200 | $1,200 | $1,200 | $1,200 | | $4,800 | | | | | | | | | Total expense | | $58,792 | $46,398 | $20,088 | $4,952 | | $130,230 | | | | | | | | | Operating income | | $16,208 | $13,602 | ($6,138) | ($3,302) | | $20,370 | | | | | | | | | Return on sales | | 22% | 23% | -44% | -200% | | 14% |
2. Why are the results using ABC so different from the original results? Explain.
The difference obtained using ABC as compared to the traditional costing method is primarily due to the fact that in traditional costing, costs of products are calculated using allocated resource bases that are predetermined. In other words it would mean that the total amount of sales is divided by the overall expenses. But with ABC, the cost of a product is calculated using both the activity drivers, which are for example the amount of activity for each activity, and resource drivers which defines how each activity level affect the resource consumption.