Executive Summary Classic Pen Case


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Executive Summary Classic Pen Case

  1. 1. Case 3 – Classic Pen Co. 17 May 2012 Groups 1 & 2 Executive Summary Problem StatementThe Traditional Income Statement (TIS) method used at the Classic Pen Company was believed to beproviding an inaccurate representation of the operating costs and return on sales.Accounting AnalysisThe Activity Based Costing (ABC) method was used to reallocate variable costs and group them intoappropriate cost pools. This can be a valuable three step process for more accurate tracking of indirectcosts to be used in managerial decisions. Below is the process used: Indirect Labor / Fringe Benefits Scheduling Blue Pen Computer Systems Set-ups Black Pen Machinery Record Keeping Red Pen Maintenance Machine Costs Purple Pen EnergyThe following graph compares the return on sales percentages using TIS and the more accurate ABCmodel. A 151% difference can be seen for the Purple Pen, for example. 100% Return on Sales 75% 27% 25% 50% 17% 22% 17% 19% Percentage 25% 0% -25% -50% -75% -39% -100% -125% Products -150% -126% TIS ABC1 TIS ABC1 TIS ABC1 TIS ABC1RecommendationAfter reviewing the results from the ABC analysis, it was determined that the set-up and productioncosts for the red and purple pens are excessively high. It was found that by instituting large productionruns at a minimum of 900 units, the Classic Pen Company can minimize indirect costs and operate muchmore profitably. The following graph shows the increase in percent on return on sales for the red andpurple pens with this recommendation implemented. 100% Return on Sales 75% 50% 22% 22% 27% 27% 21% 26% Percentage 25% 0% -25% -50% -75% -39% -100% -125% Products -150% -126% ABC1 ABC2 ABC1 ABC2 ABC1 ABC2 ABC1 ABC2