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2. Compute the activity Costs Assigned from Activity Cost Pools to the Cost Objects. Table 5: Activity Costs Assigned from Activity Cost Pools to Cost Objects Blue Black Red Purple Total Handle Production Runs Set up machines Support Products Run Machines Total Costs Assigned Paragraph Traditional Costing Systems: The Cooper Pen Company Cooper Pen, is a low-cost producer of blue pens and black pens. Recently, Cooper Pen introduced red and purple pens, using same basic production technology, combined with more complex processes, selling at prices respectively 3% and 10% higher than black and blue. According to cost estimates based on traditional costing, overall profitability for all pens decreased, but red and purple pens recorded higher profit margins than black and blue. Decision: Should Cooper Pen change its product mix so as to de-emphasize blue and black and increase production of new specialty colored pens? Table 1: Profitability by Product (Traditional Costing) Blue Black Red Purple Total Units 50,000 40,000 9.000 1.000 100.000 Price $ 4.50 $ 4.50 $ 4.65 $4.95 Sales S225,000 $180,000 $41,850 $4.950 $451,800 Direct Materials 75,000 60.000 14,040 1.650 150.690 Direct Labor 30,000 24,000 5,400 600 60,000 Indirect Costs 90.000 72,000 16,200 1,800 180.000 Tot. Mfg. Cost 195,000 156,000 35,640 14.050 390,690 Gross Margins 30,000 GM S 24,000 $6,210 $ 900 $ 61,110 G.M% of Sales 13.3% 13.3% 14.9% 18.2% Paragraph Styles Cooper's two standard products (blue and black pens) had similar production volumes and batch sizes Cooper's Traditional Cost Accounting System Cooper uses its plant as a single cost center for cost accumulation. All indirect support costs of the plant were aggregated at the plant level into one cost pool and allocated to products based on each product's direct labor cost Currently, the cost system's overhead (indirect costs) allocation (burden) rate was 300% of direct labor cost i.e., indirect support costs were allocated at a rate of $3 per Sl of direct labor costs). Before the new pens were introduced the overhead burden rate was only 200% of direct labor cost. Cooper's Change to a More Complex Production Environment Cooper observe the following major changes to a more complex production environment: Direct labor costs have decreased, and indirect costs have increased as a result of automation As specialty low-volume products, such as red and purple pens, were added Cooper's production system required more scheduling, more setups, more quality control, and a computerized system, to track orders and product specifications Making black ink is simpler; Cleaning residual blue ink from the previous run is not required if enough black ink was dumped in to cover it up Switching to red requires Cooper to stop production, and clean out all remnants of previous colors. Desinful the h alen 1 ... then Styles Paragraph Activities and Activity Cost Drivers at Cooper's ABC Analysis of the activities identified the following major pen production and support activities performed at Cooper's. This was followed by the selection of the most appropriate cost drivers that drive the costs of these activities. The activities and the activity cost drivers used by Cooper for its ABC were: Table 2: Activities, Activity Cost Pools and Activity Cost Drivers ACTIVITY ACTIVITY COST DRIVER HANDLE PRODUCTION RUNS PRODUCTION RUNS SET UP MACHINES SETUP HOURS SUPPORT PRODUCTS NUMBER OF PRODUCTS RUN MACHINES MACHINE HOURS PROVIDE FRINGE BENEFITS LABOR DOLLARS Activity Cost Drivers Requirements per Product Unit and Total Cost Driver Levels for Each Activity Based on the identified major activities & and selected cost drivers. Cooper's ABC proceeds as follows: Table 3: Activity Cost Drivers Requirements per Product Unit & Total Cost Driver Levels for Each Activity Black 0.02 0.1 65 Red 0.02 0.1 Purple 0.02 0. 1 Activity Cost Blue 10.02 Mach.hr/unit 0.1 Prod.runs 70 Setup time hr/run Total setup hr 280 of products 1 Total 2,000 10,000 50 15 200 1 34 of Pens 50.000 40.000 9.000 Assignment 3 - Last saved by user - Compatibility Mode - Saved to this PC olufemi bababu Layout References Mailings Review View Help Search - 12 - A A Aa-AEEEEE ALT ab x, x AAA AaBbCel AaBbc AaBC Emphasis Heading 1 1 Normal AaBbce AaBbCD Aa Strong Subtitle Font Paragraph Styles Reason for Cost Distortions in Cooper's Traditional Costing Systems Cooper identifies the following main reasons for growing cost distortion: Cooper's traditional costing system uses the same burden rate for all pens in allocating indirect costs. This practice is based on the implicit assumption that the production systems for all pens are of about the same complexity. As a result, Cooper's traditional costing system would report essentially identical indirect costs per direct labor dollar unit for all pens, standard and specialty. In reality.considerably more indirect and support resources are required per dollar of direct labor for the low-volume, newly designed red and purple pens than for the high-volume, standard blue and black pens. Hence, Cooper's traditional costing system over-allocates indirect costs to Blue and black pens, and under-allocates indirect costs to red and purple pens. ABC Systems: General Procedures In general, Cooper decides to pursue the following procedures, common to most ABC Systems use the following procedures: 1. Detailed analysis of the sequence of activities performed 2. Identification of the resources required for each activity 3. Estimation of the cost of performing each activity by pooling same activity costs into separate activity cost pools. 4. Choice of the most appropriate cost driver for the costs of each activity 5. Determination of the level of the cost driver made available by the resources committed to each activity. D Focus DE