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4.The overhead or indirect cost for newly introduced Red pen and Purple pen is relatively toohigh 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
2.If the company wants to continue to produce Red pen and Purple pen then they have toincrease the selling price per unit for both of the products (Red pen and Purple pen)(Assume thecompany 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 theoverhead costs for the Red pen and Purple pen.Conclusion:ABC method is the best method to allocate the overhead cost of any production system. Becausethe ABC costing system use different cost allocation base for different overhead cost based onthe internal information and the association of allocation base with each of the indirect oroverhead cost. On the other hand, the traditional costing system uses only one allocation base toallocate the overhead cost. Now in the traditional system that allocation base might not beappropriate for all the overhead expenses so that the incorrect result would hamper the profit ofthe company. Here, Classic Pen Company is the example of this incorrect pricing as they failedto determine the accurate production expenses for each of their product. Classic Pen Companyactually determine incorrect selling price for their new products under the traditional basedcosting method. But the Activity based costing method showed the Classic pen the accurateresults 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 theimplementation of activity based costing method they also have some options available to solvetheir current problems. Those options are only available because of the accurate allocation basesto allocate overhead which are the prime characteristic of the ABC costing method. 9