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Classic Pen Case
Classic Pen Case
ACCT500_ET – MANAGERIAL DECISION SUPPORT
Classic Pen Case
With all the information we had we calculate the cost per product with the ABC Method. We decided to use the absorption cost as we include fixed overhead cost in establishing our product cost.

The fringe benefits are split between the direct and the indirect labor expenses. With the information we can deduce than \$8,000 will be affected as fringe direct labor and the other \$8,000 are include in the direct labor.

The indirect labor is split in 3: 50% in production, 40% of setup time and 10% in part of administration. It gives the following result:
Computer systems are then split in two: 80% in production runs and 20 % in part of administration.
Machine Hours=\$14,000/10,000=\$1.4
\$14,000=\$8,000+\$4,000+\$2,000. The \$14,000 represent the last three categories of the table: machinery, maintenance and energy. We noticed that 10,000 machineâ€™s hours were allocated.

Repartition of indirect costs
Cost Driver
Cost Pool
Total Number of Activities
Allocation Rate
Machine Hours
\$ 14 000
10 000
Production Runs
\$ 22 000
146.67
Setup Hours
\$ 11 200
21.29
\$ 4 800
1 200
Fringe direct Labor Hours
\$ 8 000
2 000
Total
\$ 60 000
Repartitions of the MOH through the ABC method
Cost drivers
Formula
Black
Purple
Total
Machine Hours
Machine hours/units * Volume of Sales * Allocation rate
\$ 7 000.00
\$ 5 600.00
\$ 1 260.00
\$ 140.00
\$14 000.00
Production Runs
Production runs * Allocation rate
\$ 7 333.33
\$ 7 333.33
\$ 5 573.33
\$1 760.00
\$22 000.00
Setup Hours
Total setup time * Allocation rate
\$ 4 258.56
\$ 1 064.64
\$ 4 854.75
\$1 022.05
\$11 200.00
\$ 1 200.00
\$ 1 200.00
\$ 1 200.00
\$1 200.00
\$ 4 800.00
Direct Labor Hours
Direct labor hours/unit * Volume of Sales * Allocation rate
\$ 4 000.00
\$ 3 200.00
\$ 720.00
\$ 80.00
\$ 8 000.00
\$23 791.89
\$ 18 397.97
\$ 13 608.09
\$4 202.05
\$60 000.00
Now we have our costs driver and their allocation rate, we are able to compute the manufacturing overhead cost per product.
We were able to compute our Manufacturing Overhead cost of each product. Then, we have to calculate also the Direct Material Cost and the Direct Labor in order to obtain the total manufacturing cost per product.

Direct Costs and Activity Cost Drivers
Black
Purple
Total
Material cost
\$ 25,000
\$ 20,000
\$ 4,680
\$ 550
\$ 50,230
Direct Labor Hours
1,000
800
180
20
2,000
Material costs=Material unit costĂ—Production Sales Volume
Direct Labor Hour=\$20,000/2,000=\$10
As we noticed a total of 2,000 hours for the production of our 4 pens and a total cost of \$20,000, the cost of one direct labor hour is \$10.
ABC method Income statement
Black
Purple
Total
Sales
\$ 75 000.00
\$ 60 000.00
\$ 13 950.00
\$ 1 650.00
\$ 150 600.00
Material cost
\$ 25 000.00
\$ 20 000.00
\$ 4 680.00
\$ 550.00
\$ 50 230.00
Direct Labor
\$ 10 000.00
\$ 8 000.00
\$ 1 800.00
\$ 200.00
\$ 20 000.00
\$ 23 791.89
\$ 18 397.97
\$ 13 608.09
\$ 4 202.05
\$ 60 000.00
Total Manufacturing Cost
\$ 133 791.89
\$ 106 397.97
\$ 34 038.09
\$ 6 602.05
\$ 280 830.00
Operating income
\$ 16 208.11
\$ 13 602.03