Gg Toy Case Study

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 current accounting system is based on traditional cost estimation methodology by allocating overhead cost as a proportion of direct labor cost. The company margins on Geoffrey doll and the specialty branded doll #106 is 9% and 34% respectively is estimated based on the product cost do not reflect actual overhead. It should implement activity-based costing (ABC). At the current estimates, manufacturing overhead cost at the Chicago plant is $268,666, that is nearly 95% of the company total manufacturing overhead cost. By using Activity-based costing system, the company will have different manufacturing overhead cost for the three different categories of dolls because of their different in variable costs including cost associated with machine hours, and thus will have different contribution margin, unlike in traditional costing method.

However, the current cost system implemented in the Springfield plant is appropriate as they producing one product type (cradles), and no machine hours, as the company purchases all finished parts to assemble cradles.

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

Unit overhead cost:

1. 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?

Margin calculations:

The following table compares percentage margin of the three different doll models. Using the activity-based cost model, we estimated that the Geoffrey doll model margins exceeds by nearly 5 times than that of specialty branded #106 model. Whereas, the margin estimated for Cradles have no significant difference between the two costing models.

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