But for the RED pens even small traces of the blue or black ink created quality

But for the red pens even small traces of the blue or

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previous run if we just dumped in enough black ink to cover it up. But for the RED pens, even small traces of the blue or black ink created quality problems. And the ink for the new PURPLE pens also has demanding specifications, but not 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 rumours I keep hearing that even more new colours 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 Modern produced pens in a single factory. The major task was preparing and mixing the ink for the different-coloured 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 labour expense 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 labour content. Currently, this overhead burden rate was 520% of direct labour cost. Most people in the plant recalled that not too many years ago the overhead rate was only 200%. Activity-Based Costing Jane Hayvice had recently attended a seminar of her professional organisations 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 Modern. The speaker had even used an example that seemed to capture Modern’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 labour. Rather, the organisation should focus on activities performed by the indirect and support resource of the organisation and try to link the cost of 2
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performing these activities directly to the products for which they were performed. Hayvice obtained several books and articles on the subject and soon tried to put into practice the message she had heard and read about. Activity-Based Cost Analysis Hayvice first identified six categories of support expenses that were currently being allocated to pen production: EXPENSE CATEGORY EXPENSE Indirect labour $25,000 Fringe Benefits 15,000 Computer systems 10,000 Machinery 9,000 Maintenance 3,000 Energy 3,000 Total
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