We seem to be spending a lot more time on purchasing and scheduling activities

We seem to be spending a lot more time on purchasing

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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%.
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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. Activity-Based Cost Analysis Dempsey first identified six categories of support expenses that were currently being allocated to pen production: Expense Category Expense Indirect Labor $20,000 Fringe Benefits 16,000 Computer Systems 10,000 Machinery 8,000 Maintenance 4,000 Energy 2,000 TOTAL $60,000 She determined that the fringe benefits were 40% of labor expenses (both direct and indirect) and would thus represent just a percentage markup to be applied on top of direct and indirect labor charges.
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  • Spring '13
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