G.G. Toys

Based on the data provided I would recommend that the Chicago plant change its current cost system from an absorption costing system to an activity based costing system. This recommendation is based off the Chicago plant’s current product line and production methods. Because the Chicago plant is producing a variety of products which require differing levels of manufacturing overhead costs such as; labor, materials, machine time, set-ups, receiving, and shipping it would be wise to allocate those costs separately to each product line to gain a better understanding of the true unit cost per product.

The former system of costing was one in which all manufacturing overhead costs in the plant were allocated collectively to each product based solely on production-run direct labor. This method is inadequate in giving an accurate estimate of unit cost because costs not related to direct labor that vary from one product to another are not accounted for correctly. The most influential variables are set-up labor, production run quantity, and shipment quantity. If strictly using labor hours as an overhead allocation base, looking at “Exhibit 1,” one can see that the Geoffrey doll uses slightly more labor hours per unit than specialty doll 106, this would result in the total production cost of the Geoffrey doll being higher, as has been observed in previous costing exercises using absorption costing. However when the overhead costs have been broken out into cost pools based on activity, a clearer picture begins to form. In relation to units produced, Specialty Dolls have a much higher rate of set-ups, production runs, and shipments due to the nature of making custom products for customers. These three variances dramatically affect the price of specialty dolls because as seen in “Exhibit 2” the cost of each activity is actually quite high.

In regards to the Springfield plant, I would recommend that GG Toys maintain the current costing system. This recommendation is contingent on the fact that the Springfield plant currently only produces one product, using one process. Manufacturing overhead costs within the plant are all related to the manufacturing of only one thing, therefore it is not necessary to establish variable costing allocation bases because all costs will be allocated to one product. You can see that this is true based off of “Exhibit 3,” which shows the cost of a single cradle if using allocated overhead costs would be the same as the cost listed ($23.70) in the case using absorption costing methods. That being said I would recommend that the company determine how the fixed overhead costs consisting of (selling, general, and administrative) are allocated between the two plants. This would be helpful to do a cost-profit-analysis for each of the products the company sells. Without knowing how the fixed overhead it split between the two plants, this is impossible to do without making generalized estimations.

After assessing the costs of the Geoffrey doll and specialty doll 106 using activity based costing, it is clear (as shown in Exhibit 4) that the production cost for the Geoffrey doll had been priced too high, whereas the production cost of specialty doll 106 too low. Where the margin on the Geoffrey doll was formerly estimated at around 9 percent and specialty doll 106 at 34 percent after activity based costing those margins have almost switched. The Geoffrey doll is actually around a 29 percent margin, where as specialty doll 106 is actually only a 4 percent margin. These extreme differences between the old and new system exist because of differences in production methods between the two products. The Geoffrey doll in comparison to specialty doll 106 has far fewer set-up costs because the only variations between the doll are male and female, unlike specialty doll 106 which has a new set up for every variation established by every differing customer. As well the Geoffrey doll can be produced in large batches limiting production run costs, and shipping costs. It would be advisable for GG Toys to limit customer options for the specialty dolls as well as increase the minimum order quantities to attain better margins. If GG Toys is hesitant to make changes that allow for less setups, production runs and shipments, then they will need to increase the cost of the specialty dolls in order to achieve a better margin.

In addition to changes, which could be made to the specialty doll ordering process there, are a few areas where more detailed information could provide a better basis for recommendation. For example GG Toys is now producing holiday themed dolls, which only are in production for three months of the years. Detailed explanations of the manufacturing overhead, materials and labor costs for these products, would allow for a thorough analysis of whether these products are truly profitable given that taking on such specialty items required plant expansion, creating idle capacity 9 months out of the year.

Lastly when considering the introduction of the “Romaine Patch,” doll, this doll would be highly recommended based on the information given. Considering that the doll is made entirely out of scrap pajama material, one can set the material cost for the “Romaine Patch,” at $0.00 because the material cost is already accounted for in the material cost of the products generating the scrap. As well one can assume that other overhead costs such as receiving, and production costs would