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
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