CASE #4: G. G. Toys 1. Do you recommend that G. G. Toys change its existing cost system in the Chicago plant? In the Springfield plant? Why or why not? G. G. Toys should change its existing cost accounting system from traditional costing to activity-based costing (ABC) in the Chicago plant as it is allocating its entire manufacturing overhead on the basis of just one cost driver: production run direct labor cost. Since overhead at the Chicago plant is high, accurate cost accounting system is required.
Different types of dolls require different amounts of machine hours, setups, production runs, shipments, etc. By using ABC, different manufacturing overhead would be allocated to each type of doll, giving result to different contribution margins. The current costing system is good for Springfield plant as it manufactures just one product: cradles. 2. Calculate the cost of a Geoffrey doll, the specialty-branded doll #106, and a cradle using the cost study conclusions. Actual unit cost for Geoffrey doll = $15. 21 Actual unit cost for speciality-branded doll #106 = $35. 10
Actual unit cost for cradle = $23. 72 (no change) (Calculations for these cost is shown on the next page) 3. Compare and contrast the profitability of each doll under the new and old systems. Based on your recomputed product costs, what actions would you recommend the company consider to enhance its profitability? What additional information would you like to have to make these recommendations? Under old system (Traditional Costing) Geoffrey DollSpeciality-Branded #106Cradle Standard unit cost($)19. 1923. 7423. 70 Selling price($)21. 0036. 0030. 00 Contribution margin($)1. 112. 266. 30 CM Ratio9%34%21% Under new system (Activity-Based Costing) Geoffrey DollSpeciality-Branded #106Cradle Standard unit cost($)15. 2135. 1023. 72 Selling price($)21. 0036. 0030. 00 Contribution margin($)5. 790. 906. 30 CM Ratio28%3%21% The ABC system gives results that are dramatically different from those of the traditional cost allocation system. According to the new computed unit cost, management should push marketing to emphasize the sales of Geoffrey Doll because of its large contribution margin. They can also increase the price of Specialty Doll #106.
Since the cradle is a product which complements the sales of the dolls and it has a high contribution margin, they could try to sell the products as a bundle by mixing either doll with a cradle. Additional information that would help in making these recommendations include market research or analysis of demand and trends on the future outlook of the sales of each doll. Also, gathering information on what competitors price comparable dolls would be helpful. 4. How should G. G. Toys account for the excess capacity created to produce the holiday reindeer dolls?
Qualitatively, how will this impact your calculated cost of the Geoffrey doll and the specialty-branded dolls in question from number 2? Explain your method and its impact. (Answer qualitatively. Do not recompute any of your product costs from question 2. ) Since the excess capacity created would be used only for few months, it would lead to large volume variances where, for example, it would reflect failure to reach production levels built into the overhead rate. To account for the unused capacity, we can follow an opportunity cost approach where lost profit margins are traced to underutilized capacity.
By determining the full cost of unused capacity, including cost for machine depreciation, a basis for establishing accountability for the cost of all resources committed in establishing capacity can be achieved. If the holiday reindeer dolls do not use any resources such as setup, production runs, or shipments, the costing of other dolls would not be affected. However, if they share the same cost pools, it would impact the overhead cost allocated to Geoffrey Doll and Specialty Doll #106. We would recalculate the cost per driver unit for each cost pool.
Then, for each cost pool for a particular doll, we would multiply the corresponding cost driver per unit with the driver units and sum them up to find the total cost a particular doll. To derive the per unit overhead cost for that doll, we would divide the total cost by the number of units produced. 5. What explains the difference between forecasted and actual revenue for the Chicago plant during March of 2000? What other information would you collect to help explain this difference? ActualBudgeted Number of Units24,00024,900 Revenue$786,000$765,000 Variance Analysis:
AP = 786,000 / 24,000 = $32. 75 SP = 765,000 / 24,900 = $30. 73 AQ = 32,000 SQ = 24,900 Price Variance = (AP – SP) AQ = (32. 75-30. 73) x 24,000 = $48,480. 00 F Quantity Variance = (AQ – SQ) SP = (24,000-24,900) x 30. 73 = $(27,657. 00) U Total Variance = PV + QV = $20,823 F Even though the actual number of units produced was less than budgeted, the actual revenue was higher due to the favorable price variance. It may be that dolls were sold at a greater price than was budgeted, or perhaps more dolls whose sales price is greater were sold than dolls whose sales price is less.
If we had the budgeted units produced for each type of doll, this difference could be better explained. 6. Do you recommend G. G. Toys produce the Romaine Patch doll? Why or why not? (Ignore manufacturing overhead costs including packaging, shipping, and receiving and production control. ) If G. G. Toys bought materials from an external source, the result would be a negative contribution margin. Sales price$8 Labor price$3 Material cost$6 Contribution margin($1) Whereas, if scrap material was used, the result would be a positive contribution margin of $5. Sales price$8 Labor price$3 Material Cost$0
Contribution margin$5 G. G. Toys should produce the Romaine Patch doll using only scrap materials, and the units to be produced is highly dependent upon the amount of scrap material that is available and usable. Hence, we would recommend the production of Romaine Patch Doll using scrap materials for the following reasons: •To capitalize on the scrap materials resulted from making the pajamas for the dolls. •To sell a doll at a more reasonable price to customers who may not be able to afford the other dolls made by G. G. Toys. •To advertise the company as an eco-friendly manufacturer by using recycled materials.