4 The overhead or indirect cost for newly introduced Red pen and Purple pen is

4 the overhead or indirect cost for newly introduced

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4. The overhead or indirect cost for newly introduced Red pen and Purple pen is relatively too high which in return increase the overall cost so that the company faced loss. Recommendations based on the ABC costing method: 1. The company might stop producing the Red pens and Purple pens. 8
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2. If the company wants to continue to produce Red pen and Purple pen then they have to increase the selling price per unit for both of the products (Red pen and Purple pen) (Assume the company determine the selling price of the products solely based on its production cost). 3. By managing overhead cost effectively and efficiently the company has to minimize the overhead costs for the Red pen and Purple pen. Conclusion: ABC method is the best method to allocate the overhead cost of any production system. Because the ABC costing system use different cost allocation base for different overhead cost based on the internal information and the association of allocation base with each of the indirect or overhead cost. On the other hand, the traditional costing system uses only one allocation base to allocate the overhead cost. Now in the traditional system that allocation base might not be appropriate for all the overhead expenses so that the incorrect result would hamper the profit of the company. Here, Classic Pen Company is the example of this incorrect pricing as they failed to determine the accurate production expenses for each of their product. Classic Pen Company actually determine incorrect selling price for their new products under the traditional based costing method. But the Activity based costing method showed the Classic pen the accurate results which in return to help them to determine accurate selling price based on production cost (assume that the company determined price only based on the production cost). Based on the implementation of activity based costing method they also have some options available to solve their current problems. Those options are only available because of the accurate allocation bases to allocate overhead which are the prime characteristic of the ABC costing method. 9
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