Case: Costs and Chicago Plant
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 = $23.72 (no change)
(Calculations for these cost is shown on the next page)
3. Compare and contrast the profitability of each doll under the new and old systems. Based on your recomputed product costs, what actions would you recommend the company consider to enhance its profitability? What additional information would you like to have to make these recommendations?
Under old system (Traditional Costing)
Geoffrey Doll Speciality-Branded #106 Cradle
Standard unit cost($) 19.19 23.74 23.70
Selling price($) 21.00 36.00 30.00
Contribution margin($) 1.81 12.26 6.30
CM Ratio 9% 34% 21%
Estimation of Cost Driver Rates
Cost Pool Cost (from Exhibit 1) Allocation Base (from Exhibits 1 and 4) Cost Driver Rate (= Cost / Allocation Base)
Plant Management 40,000 27,000 $1.48
Machine Related 112,000 11,200 $10.00
Setup 13,333 160 $83.33
Receiving/Production Control 63,000 161
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 = $23.72 (no change)
(Calculations for these cost is shown on the next page)
3. Compare and contrast the profitability of each doll under the new and old systems. Based on your recomputed product costs, what actions would you recommend the company consider to enhance its profitability? What additional information would you like to have to make these recommendations?
Under old system (Traditional Costing)
Geoffrey Doll Speciality-Branded #106 Cradle
Standard unit cost($) 19.19 23.74 23.70
Selling price($) 21.00 36.00 30.00
Contribution margin($) 1.81 12.26 6.30
CM Ratio 9% 34% 21%
Estimation of Cost Driver Rates
Cost Pool Cost (from Exhibit 1) Allocation Base (from Exhibits 1 and 4) Cost Driver Rate (= Cost / Allocation Base)
Plant Management 40,000 27,000 $1.48
Machine Related 112,000 11,200 $10.00
Setup 13,333 160 $83.33
Receiving/Production Control 63,000 161