Memorandum
To: Robert Parker, President of G. G. Toys From: Tony Cai & Lindsey Marchand Date: 28 September 2017 Re: Cost Analysis and Price Analysis of Chicago Plant In the Chicago plant, G. G. Toys manufactures 3 different categories of dolls. Each of these dolls require various amounts of machine hours and other variable costs. Currently the company calculates manufacturing overhead costs with only one cost driver: direct labor. From the information provided, we know that the manufacturing overhead at this plant is very high roughly 95% of the overall G. G. Toys manufacturing overhead expense.
Because of this, we have determined that switching to an activity-based costing (ABC), would yield a more accurate representation of cost allocation and hence a different contribution margin. It is in our opinion, that this will be a success for measurement for controllability and relevance long term.
The Springfield plant, however, has only approximately 5% of the overall overhead costs of the company and purchases finished components from local manufacturers - assembling the cradles with manual labor only. Due to this and the product exclusiveness, we recommend G. G. Toys to maintain the existing cost accounting system as the primary costs driver is labor hours.
Cost Analysis
First, we examine the overhead rate per cost driver. We find this information in the various exhibits provided in the case.
Overhead cost pool
Cost driver
Total cost (A)
Capacity Levels (B)
Rate per unit of cost driver (A/B) Machine Related Machine hours $112, 000 11, 200 hrs.
$10
Setup Labor Related
No. of production set-ups $13, 333 160 setups $83. 33 Production Order Related No. of production runs $63, 000 161 runs $391. 30 Packaging and Shipping No. of shipments $53, 000 350 shipments $151. 43 Plant Mgmt. & Facilities Production units $40, 000 27, 000 units $1. 48 Second, we examine the allocation of overhead to the three products. We calculated this by multiplying the rate per cost driver from the above table by the level of activity for each as demonstrated by Exhibit 4 in the case as follows:
Overhead costs
Geoffrey Doll
Specialty Branded # 106
Cradles
Machine runs
$37, 500
$12, 000
$0
Facilities
11, 111. 11
5, 925. 93
4, 444. 44
Setups
833. 31
8, 333. 13
0
Production runs
3, 913. 04
39, 130. 43
391. 30
Number of shipments
1, 514. 29
33, 314. 29
7, 571. 43
Total allocated OH
$54, 871. 75
$98, 703. 77
$12, 407. 17
Divide: Units produced 7, 500 4, 000 3, 000 Cost of OH per unit $7. 32 $24. 68 $4. 14 Third, we compute the adjusted gross margins for each product using the unit costs:
Costs
Geoffrey Doll
Specialty Branded #106
Cradles
Direct Labor cost
$3. 00
$3. 75
$7. 50
Direct Materials cost 5. 00 6. 00 12. 00 Manufacturing Overhead (ABC Costing) 7. 32 24. 68 4. 14 Standard Unit cost $15. 32 $34. 43 $23. 64 Selling Price 21. 00 36. 00 30. 00 Gross margin $5. 68 $1. 57 $6. 36 Gross margin % (...
