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?

In the Chicago plant, G.G. Toys should change its existing cost accounting system
from the legacy or traditional costing methodology to activity-based costing (ABC).
In allocating overhead as a percentage of direct labor cost, the margins of 9% and
34% in the Geoffrey doll and the specialty branded doll #106 respectively, do not
reflect the actual cost of overhead.

Currently G.G. Toys is calculating its manufacturing overhead costs on only on one
cost driver, the direct labor. From case facts, we know that the manufacturing
overhead at the Chicago plant is very high (approximately 95% of the overall GG
Toys manufacturing overhead)

The 3 different categories of dolls require different amounts of machine hours and
other variable costs. By using Activity-based costing, each specific category of doll
would have a different manufacturing overhead (and hence different contribution
margin) allocated to it and the profit margin analysis for the doll category would yield
an accurate result that can be used successfully for measuring controllability and
relevance over long run.

For the Springfield plant, GG Toys has approximately 5% of the overall overhead and
from case fact, we know that GG purchases finished components from local
manufacturers and then assemble the components (to form the cradles) using manual
labor and there is no machine hours involved in this (Exhibit # 1). So, I recommend
GG to keep the existing cost accounting system as the primary cost driver here is
labor hours which is being rightly applied as the cost allocation basis. Moreover,
ABC methodology is unnecessary because Springfield plant is related to producing
only one product.

2. Calculate the cost of Geoffrey Doll, the specialty-branded doll # 106, and a
cradle using the cost study conclusions

Total cost in Practical Activity

Cost pool Cost driver pool Capacity Rate Unit
Machine per m/c
Related Machine Hours $112,000 11200 $10 hour
Setup Labor
Related # of Setups $13,333 160 $83.33 per setup
Production per prod.
Order Number of Production $63,000 161 $391.30 Run
Related Orders        
Packaging
and per
Shipping Number of Shipments $53,000 350 $151.43 shipment
Plant Mgmt. Number of Production
& Facilities units $40,000 27000 $1.48 per unit

Specialty
Category   Geoffrey Doll Branded # 106 Cradles
Units   7500 4000 3000
Unit Level costs Machine Runs $37,500 $12,000 $0
  Facilities $11,111.11 $5,925.93 $4,444
Batch Level Setups $833.31 $8,333.13 $0
  Prod. Run $3,913.04 $39,130.43 $391
# of
  shipments $1,514.29 $33,314.29 $7,571
Total Mfg. Overhead   $54,871.75 $98,703.77 $12,407.18
Unit Overhead cost   $7.32 $24.68 $4.14

Cost Category Geoffrey Doll Specialty Branded Cradle

    Doll # 106  
       
Direct Labor cost $3.00 $3.75 $7.50
Direct Materials cost $5.00 $6.00 $12.00
Manufacturing
Overhead $7.22 $24.68 $4.14
Standard Unit cost $15.22 $34.43 $23.64
Selling Price $21.00 $36.00 $30.00
Margin $5.78 $1.57 $6.36
% Margin 27.52% 4.37% 21.21%

3. Compare and contrast the profitability of each doll under the new and the
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?
 Geoffrey Doll Speciality Branded Cradle
  Doll # 106  
Traditional 9.00% 34.00% 21.00%
Activity Based 27.52% 4.37% 21.21%

Based on the above analysis, the following are the actions that I would recommend
the company consider enhancing its profitability

 Change the sales mix of the toy category. Sell more of Geoffrey Doll and
Cradle but do not sell Specialty Branded Doll # 106

 Implement Activity based costing in the Chicago Plant but keep the existing
costing procedure in the Springfield plant.

 Increasing the batch size would reduce the number of batches which can
increase the contribution margin and thereby the profit margin.

 Replacing existing machinery with more efficient production machines that

can reduce the machine run time.

 Carefully examine the total material requirement to build the dolls and the
pajamas and then order for the raw materials.