ABC- Cooper Pen.ppt - Activity-Based Cost Management Problems With Simple Cost Accounting Systems The Cooper Pen Company Example Cooper Pen had been the

ABC- Cooper Pen.ppt - Activity-Based Cost Management...

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Activity-Based Cost Management
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Problems With Simple Cost Accounting Systems: The Cooper Pen Company Example Cooper Pen had been the low-cost producer of blue pens and black pens, with profit margins exceeding 20% of sales Several years ago Cooper Pen expanded their business by extending their product line into products with premium selling prices
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The Cooper Pen Company Example Five years ago red pens were introduced The same basic production technology Could be sold at a price that was 3% higher than for blue and black pens Last year purple pens were added Could be sold at a 10% price premium The controller of Cooper Pen was disappointed with the most recent quarter’s financial results Overall profitability for all four together had decreased The red and purple pens, however, were more profitable than the blue and black pens
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Total Profitability by Product Blue Black Red Purple Total Units 50,000 40,000 9,000 1,000 100,000 Price $ 1.50 $ 1.50 $ 1.55 $ 1.65 Sales $75,000 $60,000 $13,950 $1,650 $150,600 Material 25,000 20,000 4,680 550 50,230 Labor 10,000 8,000 1,800 200 20,000 Overhead 30,000 24,000 5,400 600 60,000 Total Mfg. Expenses 65,000 52,000 11,880 1,350 390,690 Gross Margin $ 10,000 $ 8,000 $ 2,070 $ 300 $ 20,370 G.M. % 13.6% 13.3% 14.8% 18.2% 13.5%
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Concern at Cooper Pen The controller of Cooper Pen wondered whether the company should continue to deemphasize the blue and black commodity products and keep introducing new specialty colored pens Cooper’s manufacturing manager commented on how the introduction of colored pens had changed the production environment: Everything ran smoothly when producing just blue and black pens in long production runs Difficulties started when the red pens were introduced and required more changeovers
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Changes Caused by New Pens (1 of 2) Making black ink was simple; there was not even a need to clean out the residual blue ink from the previous run if enough black ink was dumped in to cover it up Red required Cooper to stop production, empty the vats, clean out all remnants of the previous color, and then start the production of the red ink Even small traces of the blue or black ink created quality problems The ink for the purple pens also had demanding specifications, though not quite as demanding as the red ink
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Changes Caused by New Pens (2 of 2) Cooper Pens was also spending more time on
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