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` Classic Pen company had been a low-cost producer of
pens for several years.
` It manufactured BLUE and BLACK colored pens
` As part of product diversification they introduced RED
and PURPLE colored pens.
` BLUE and BLACK pens gave 20% profit on sales
` RED pen & PURPLE pen were expected to give 3%
premium & 10% premium respectively.
 

 




` Êverall profitability was decreasing
` All the 4 products failed to generate expected return.




` aulty overhead absorption system.
` They treated overhead as a burden.
` Same overhead absorption rate for all 4 type of pens
i.e. 300% of Direct Labor.
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` Identification of various support cost heads.
` Indirect Labor Ȃ $ 20,000
` ringe Benefits - $ 16,000
` Computer System - $ 10,000
` Machinery - $ 8,000
` Maintenance - $ 4,000
` Energy - $ 2,000
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` Identification of activities on which costs of various
support cost heads were incurred:
` Indirect Labor - $ 20,000
` Scheduling & Production handling, etc. Ȃ 50%
` Physical Changeover - 40%
` Records Maintenance - 10%
` ringe Benefits - $ 16,000 (40% 0f Direct Labor +
Indirect Labor)
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` Computer Expenses - $ 10,000
` Production Run Scheduling - 80%
` Record Ȃ Keeping - 20%
` Machinery + Maintenance + Energy - $14,000
` Incurred to supply machine capacity
` Total Machine Hours Ȃ 10,000 hrs.



 
 




THANK
YÊU