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Manisha Misra
Jayanta Chakraborty
Tushar Kanti Nayak
Payal Patnaik
Debajyoti Raha
Abhishek Dash
Madhulika Sourabh

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î COMPANY OVERVIEW
î OPERATIONS OF THE COMPANY
î COMPANY·S CONCERN
î CAUSES OF CONCERN
î OBSERVATION OF DENNIS SELMOR
î VIEWS OF JEFFRY DONALD
î APPROACHES OF JANE DEMSEY
î APPROACHES OF ABC ANALYSIS
î TRADITIONAL METHOD OF ACTIVITY COSTING
î CONCLUSION

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î Jane Dempsey was the controller of the company
î The company manufactured BLUE and BLACK
colored pens
î The company had been the low-cost producer of
traditional BLUE & BLACK pens.
î Profit margins were over 20% of sales
î As part of product diversification the company
introduced RED and PURPLE colored pens
î RED pen & PURPLE pen were expected to give 3%
premium & 10% premium respectively.

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î Classic company produced pen was a single company

î The major task was preparing & mixing the ink for the different
color pens
î The Ink was inserted into the pens in a semi automated process
î A final packing & shipping stage was performed manually
î Each product had a bill of materials that identified the quantity
& cost of direct materials required for the product
î All the plants indirect expenses were aggregated at the plant
level & allocated to product based on their direct labour content
î The sequence of operations for each operating steps were
identified through routing sheet which is used to calculate the
labour expenses for each of the four products based on the
direct labour content

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î Overall profitability was decreasing

î All the 4 products failed to generate expected return.
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î Faulty overhead absorption system.
î They treated overhead as a burden.
î Same overhead absorption rate for all 4 type of pens
i.e. 300% of Direct Labor.

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î He was the sales manager of the company earlier
î He observed the opportunities to expand the business by
extending the product line into new products that offered
premium selling price over traditional BLUE & BLACK pens
î BLUE and BLACK pens gave 20% profit on sales
î Five years earlier RED pen was introduced but sold at 3%
premium
î Later PURPLE pen was introduced & were expected to 10%
premium respectively.
î Dennis claims that consumers are willing to pay higher prices
for the special colors

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î He was the manufacturing manager of the company
î BLUE & BLACK pens runs smoothly without any
intervention
î Making BLACK ink was simple
î Introducing RED pens create a lot of difficulties
î Ink for the new PURPLE pens also has demanding
specifications but not as demanding as RED pens
î Concerned about the future rumors like introducing
of new colors would hamper the operations in the
company

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î Jane Dempsey was the controller of the classic pen

company
î She was disappointed after seen the financial
results of the company
î She was moved by hearing the new concept of
activity based costing (ABC) & soon tried to put into
practice into her organization
î Dempsey first identify the six categories of support
expenses that were currently being allocated to pen
production
î Then she move on to further approaches of ABC
analysis
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î Identification of various support cost heads.
î Indirect Labor ² $ 20,000
î Fringe Benefits - $ 16,000
î Computer System - $ 10,000
î Machinery - $ 8,000
î Maintenance - $ 4,000
î Energy - $ 2,000
î TOTAL- $60000

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î Identification of activities on which costs of various
support cost heads were incurred:
î Indirect Labor - $ 20,000
î Scheduling & Production handling, etc. ² 50%
î Physical Changeover - 40%
î Records Maintenance - 10%
î Fringe Benefits - $ 16,000
(40% 0f Direct Labor + Indirect Labor)

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î Computer Expenses - $ 10,000

î Production Run Scheduling - 80%
î Record ² Keeping - 20%
î Machinery + Maintenance + Energy - $14,000
î Incurred to supply machine capacity
î Total Machine Hours ² 10,000 hrs.

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Through ABC method of costing we found that:
î Return on Sales of BLUE BLACK,RED,PURPLE pens
are 21.6%,22.7%,-44.0%,-200.1% respectively
î To produce the new product the company has added
large quantity of overhead: Computer System &
Support Expenses
î The overhead to the new product are high under
ABC method which is positive correct reflect of cost
determination
î As RED & PURPLE incurring huge amount of loss
hence the production should be stopped
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