G.G. Toys

Assignment PGID: 1421007

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?

Ans- 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.

Ans-

Actual unit cost for Geoffrey doll = $15.21

Actual unit cost for specialty-branded doll #106 = $35.10

Actual unit cost for cradle = $23.72 (no change)

(Calculations for these cost is shown on the next page)

G.G. Toys

Assignment PGID: 1421007

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)

Ans-

Geoffrey Doll Specialty-Branded

Standard unit cost ($) 19.1923.7423.70

Selling price ($) 21.0036.0030.00

Contribution margin ($) 1.8112.266.30

CM Ratio 9%, 34% and 21%

Under new system (Activity-Based Costing)

Geoffrey Doll Specialty

Standard unit cost ($)15.2135.1023.72

Selling price ($)21.0036.0030.00

Contribution margin ($)5.790.906.30

CM Ratio 28%,3% and 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.

G.G. Toys

Assignment PGID: 1421007

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.)

Ans-

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. 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? Actual Budgeted

Number of Units 24,00024,900

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

G.G. Toys

Assignment PGID: 1421007

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

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.)

Ans-

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

G.G. Toys

Assignment PGID: 1421007

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.