We seem to be spending a lot more time on purchasing

quite as demanding as for RED pens.
We seem to be spending a lot more time on
purchasing and scheduling activities and just
keeping track of where we stand on existing,
backlogged, and future orders. The new computer
system we got last year helped a lot to reduce the
confusion. But I am concerned about rumors I keep
hearing that even more new colors may be
introduced in the near future. I don’t think we have
any more capability to handle additional confusion
and complexity in our operations.
Operations
Classic produced pens in a single factory. The major task
was preparing and mixing the ink for the different-
colored pens. The ink was inserted into the pens in a
semiautomated process. A final packing and shipping
stage was performed manually.
Each product had a bill of materials that identified the
quantity and cost of direct materials required for the
product. A routing sheet identified the sequence of
operations required for each operating step. This
information was used to calculate the labor expenses for
each of the four products. All of the plant's indirect
expenses were aggregated at the plant level and allocated
to products on the basis of their direct labor content.
Currently, this overhead burden rate was 300% of direct
labor cost. Most people in the plant recalled that not too
many years ago the overhead rate was only 200%.
Activity-Based Costing
Jane Dempsey had recently attended a seminar of her
professional organization in which a professor had talked
about a new concept, called activity-based costing
(ABC). This concept seemed to address many of the
problems she had been seeing at Classic. The speaker had
even used an example that seemed to capture Classic's
situation exactly.
The professor had argued that overhead should not be
viewed as a cost or a burden to be allocated on top of
direct labor. Rather, the organization should focus on
activities performed by the indirect and support resource
of the organization and try to link the cost of performing
these activities directly to the products for which they
were performed. Dempsey obtained several books and
articles on the subject and soon tried to put into practice
the message she had heard and read about.