MacEwan University ACCT 324 Classic Pen Company ABC Model

This case study solution analyzes the Classic Pen Company using the Activity Based Costing (ABC) model to determine the operating profit for different pen types (Blue, Black, Red, and Purple). It includes detailed calculations for cost allocation, considering factors like direct materials, direct labor, indirect labor, fringe benefits, computer system costs, machinery maintenance, and energy. The solution recommends that the company adopt a more systematic and rational approach to cost allocation, comparing traditional costing methods with activity-based costing. It suggests simplifying the cost allocation process and implementing performance-based compensation for employees. The document references relevant academic sources to support its analysis and recommendations. Desklib offers a platform with a variety of study tools and resources for students.

Management Accounting

Table of Contents
Computation of the operating profit by Activity based costing method.....................................3
Recommendation to the company...............................................................................................4

QUESTION 1
Computation of the operating profit by Activity based costing method
Table 1 Computation of the operating profit
Particulars Blue Black Red Purple
Number of units 50000 40000 9000 1000
Revenue 75000 60000 13950 1650
Direct Material Cost 25000 20000 4680 550
Direct Labor 1000 800 180 20
Indirect Labor cost 6466.67 4666.67 5913.33 2953.33
Fringe benefit cost 4586.67 3866.67 4363.33 3181.33
Computer system cost 3166.67 3166.67 2526.67 1140
Machinery 4000 3200 720 80
Maintenance 2000 1600 360 40
Energy 1000 800 180 20
Operating Profit/Loss 27779.99 21899.99 -4973.3 -6334.7
Working Notes
Determination of the cost driver and allocation of cost
Table 2 allocation of cost on the basis of activity based costing method
Particulars
Overhead
Cost Cost Driver Blue Black Red Purple
Indirect Labor
Cost 10000 Production run
3333.3
3
3333.3
3
2533.3
3 800
8000 Set up run
2133.3
3
533.33
3 3200
2133.3
3
2000 Volume 1000 800 180 20
Total
6466.6
7
4666.6
7
5913.3
3
2953.3
3

Fringe Benefit 8000 Direct Labor cost 2000 2000 2000 2000
8000
Indirect Labor
cost
2586.6
7
1866.6
7
2365.3
3
1181.3
3
Total
4586.6
7
3866.6
7
4365.3
3
3181.3
3
Computer System 8000 Production run
2666.6
7
2666.6
7
2026.6
7 640
2000
Parts
administration 500 500 500 500
Total
3166.6
7
3166.6
7
2526.6
7 1140
Machinery 8000 Machine Hour 4000 3200 720 80
Maintenance 4000 Machine Hour 2000 1600 360 40
Energy 2000 Machine Hour 1000 800 180 20
 50% of the indirect labor cost is divided into production run basis, 40% is on set up run,
and 10% in the ratio of volume.
 50% of the fringe benefit tax is divided as per the direct labor hour basis, which is equal.
Another 50% is divided as per indirect labor basis.
 80% of the computer system cost is bifurcated as per production run basis and remaining
20% on the basis parts and administration
 Machinery, maintenance, and energy cost is allocated on the basis of machine hour,
because it is given that this overhead incurred to supply machine capacity.
QUESTION 2
Recommendation to the company
For the determination of the appropriate profit margin, the company is recommended to allocate
the cost in a systematic and rational manner. With this aspect, generally there are two methods of

costing, which are applied by the company for the assignment of cost, the namely traditional
method of costing, and activity based costing (Mahal, & Hossain, 2015).
In the traditional method of costing, indirect overhead are allocated by the company on the basis
of predetermined overhead rate. This method is useful only when there is less amount of the
indirect overhead. In this method, company has to first identify the indirect cost and then
determine the cost driver such as machine hour or labor hour. All the indirect overhead are
divided by the cost driver and on the basis of this rate, overhead is allocated. On the other hand,
in the activity based costing system cost is allocated on the basis of identification of the cost
driver of the activity. It is more reliable and accurate method as compare with traditional costing
method. However, it is costly and time consuming method (Esmalifalak, Albin, & Behzadpoor,
2015).
By considering the determination of cost in the part one, it is observed that, company uses very
complex method of allocation of cost driver. It is recommended that, it should use some easy or
rational method by which cost can be appropriately allocated to the product. Further, it is also
recommended that, company should apply the performance-based salary or wages to its
employee, so that they will guided towards for improvement in the performance

REFERENCES
Esmalifalak, H., Albin, M. S., & Behzadpoor, M. (2015). A comparative study on the activity
based costing systems: Traditional, fuzzy and Monte Carlo approaches. Health Policy and
Technology, 4(1), 58-67.
Mahal, I., & Hossain, A. (2015). Activity-Based Costing (ABC)–An Effective Tool for Better
Management. Research Journal of Finance and Accounting, 6(4), 66-74.