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

Activity-Based
Cost Management

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

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

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%

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

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

Changes Caused by New Pens
(2 of 2)
•
Cooper Pens was also spending more time on