4 the overhead or indirect cost for newly introduced

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.
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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.
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