G.G. Toys1.

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Do you recommend that G.G. Toys change its existing costsystem in the Chicago Plant? In the Springfield plant? Why orwhy not ?In the Chicago plant, G.G. Toys should change its existing costaccounting system from the legacy or traditional costing methodologyto activity-based costing (ABC). In allocating overhead as a percentageof direct labor cost, the margins of 9% and 34% in the Geoffrey dolland the specialty branded doll #106 respectively, do not reflect theactual cost of overhead.Currently G.G. Toys is calculating its manufacturing overhead costs ononly on one cost driver, the direct labor. From case facts, we knowthat 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-basedcosting, each specific category of doll would have a differentmanufacturing overhead (and hence different contribution margin)allocated to it and the profit margin analysis for the doll categorywould yield an accurate result that can be used successfully formeasuring controllability and relevance over long run.For the Springfield plant, GG Toys has approximately 5% of the overalloverhead and from case fact, we know that GG purchases finishedcomponents from local manufacturers and then assemble thecomponents (to form the cradles) using manual labor and there is nomachine hours involved in this (Exhibit # 1). So, I recommend GG tokeep the existing cost accounting system as the primary cost driverhere is labor hours which is being rightly applied as the cost allocation basis. Moreover, ABC methodology is unnecessary because Springfieldplant is related to producing only one product
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