Running Head: G.

G TOYS 1

G.G. Toys

Name

Institution

Course Code

Date

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 G.G TOYS 2

Do you recommend that G.G. Toys change its existing cost system in the Chicago plant? In
the Springfield plant? Why or why not?
Based on the fact that the Chicago based plant produces more than one product means that the
company has to change its costing method from the legacy or traditional cost-based method to
one which is based on the activities undertaken per product alternatively referred to as activity-
based costing (ABC) (Woodruff, 2018). The ABC system is suitable since the company’s
overhead costs are largely dependent on direct labour costs. Exhibit 1 clearly shows that when it
comes to labour as a variable, Specialty branded dolls use significantly lesser hours of labour per
unit as compared to the Geoffrey doll resulting in a high cost of production for the former as
observed from the traditional costing system. Allocation of overhead costs by G.G. Toys as a
percentage of the direct labour costs does not mirror the cumulative overhead cost. The same
case applies to the calculated margins in the Geoffrey and the specialty branded doll #106 of 9%
and 34% respectively. A clear picture begins to form after breaking down the overhead costs into
the specific activity-based cost pools. Specialty branded dolls also register a high number of
shipment, production runs and machine setups due the its ability to produce custom made
products for its customers. The fore mentioned variables have an impact of the doll’s price as
shown in Exhibit 2 as each variable brings with it a high cost.
Ninety-five percent of the Chicago based G.G. Toy’s manufacturing overhead goes to the
manufacturing overhead costs which is not appropriate giving more reason for a change in the
cost-accounting system. The different products at the company have different shipment, time
taken for production, setups and production hours among other variables making the ABC
system most suitable as it will diversify each category’s contribution margin through the
allocation of different overhead costs to a specific doll. My recommendation for the company
would be to identify how the different SG & A (fixed) costs are split between the Geoffrey and
Specialty branded dolls so as to conduct an analysis on the cost and profit of the products sold
without using general estimations.
Approximately five percent of the cumulative manufacturing overhead is attributed to the
Springfield facility as shown in the case fact. This can be interpreted that the company does not
manufacture its inputs but rather prefers buying them from local manufacturers and then
proceeds to assemble them manually. This is drawn from Exhibit 1 where there are no machine
costs for the Springfield plant. Pursuant to that, the Springfield facility would be better off
sticking to the current costing system since labour hours (the main cost driver) is accurately
applied as the basis for cost allocation. More so, the design of the plant allows it to only produce
one product making the ABC system superfluous. Exhibit 3 shows the cost the cost of each
cradle to be unchanged regardless of which method of accounting you are using after allocating
overhead costs to it. From the table below the total price is set at 23.7 USD and remains
unchanged. In addition, each doll’s profit-margin analysis yields accurate results which the firm
can use to gauge long run controllability and relevance. Therefore, the current costing system is
applicable at Springfield due to its production of Cradles as the sole product.

Calculate the cost of a Geoffrey doll, the specialty-brand doll #106, and a cradle using the
cost study conclusions.
Pool of cost Machine capacity total price Rate of
activity
(total price /
machine

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 G.G TOYS 3

capacity)
Setup machine 11200 112000 10
order of production 161 63000 391.304347
8
shipping / packaging 350 53000 151.428571
4
plant management and facilities 27000 40000 1.48148148
1
machine setup labour 160 13333 83.33125
The cost driver for machine is the time used by the machine measured per hour
The cost driver for production order is the count of production measured per production
count of shipments is the cost driver for production measured per shipment
count of production units is the cost driver for plant facilities and management measured per unit
count of setups is the cost driver for labour used in setting up the machine measured per setup
overhead costs per unit Specialty
Cradles branded Geoffrey
#106 Doll
Units of production 3000 4000 7500
level costs per Unit run of machine 0 12000 37500
plant management and 4444.44 5925.93 11111.11
facilities
Total units level costs 4444.44 17925.93 48611.11
costs of batch levels setup count 0 8333.13 833.31
count of production runs 391.3 39130.43 3913.04
count of shipments 7571.43 33314.29 1514.29
Total costs of batch levels 7962.73 80777.85 6260.64
total cost on manufacturing 12407.17 98703.78 54871.75
overhead = (total cost on
manufacturing overhead/ units
of production)
overhead costs per unit 4.13572333 24.675945 7.3162333
3 3

Compare and contrast the profitability of each doll under the new and old systems.
Based on your recomputed product costs, what actions would you recommend the company
consider enhancing its profitability? What additional information would you like to have to
make these recommendations? Under old system (Traditional Costing)
Traditional system
Cradle

cost per unit (USD) 23.7

selling/ market price(USD) 30.0
Contribution Margin(USD) 6.3

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 G.G TOYS 4

% contribution margin (USD) = Contribution Margin(USD)/ selling/ market 21.00%

price(USD)

Activity Based Costing

Cradles Geoffrey Specialty-
Doll Branded
Doll # 106
overhead costs in manufacture 4.14 7.32 24.68
(USD)
Direct cost of material (USD) 12.00 5.00 6.00
Direct cost of labour (USD) 7.50 3.00 3.75
total cost per unit (USD) 23.64 15.32 34.43
selling/ market price(USD) 30.00 21.00 36.00
contribution margin (USD) 6.36 5.68 1.57
% contribution margin (USD) = 21.21% 27.07% 4.37%
Contribution Margin(USD)/
selling/ market price(USD)

From the above data, the results obtained from the Activity Based Costing varies significantly
from that from the traditional cost allocation system. The new calculated unit costs, the highest
contribution margin comes from Geoffrey Doll which means that the management should carry
out marketing activities with keen focus to Geoffrey Doll to help push the sales volumes (Gallo,
2017). Alternatively, increasing the price of Specialty-Branded #106 dolls by the management
can achieve the desired results of increased revenue. The cradle toy is considered as a
supplement of the two other brands despite having a relatively high contribution margin.
Through a proper market analysis that involves studying competitor prices and research on
market trends, the company can boost sales by introducing a bundle package which has Cradle
toys sold as a bundle with either of the other two brands.
How should G.G. Toys account for the excess capacity created to produce the holiday
reindeer dolls? Qualitatively, how will this impact your calculated cost of the Geoffrey doll
and the specialty-branded dolls in question number 2? Explain your method and its
impact. (Answer qualitatively. Do not re-compute any of your product costs in question 2.)
The excess capacity manufactured could only be consumed for a few months leading to large
variances in volume in places where, due to the overhead rate, the plant failed to attain the
required production capacity. An opportunity cost approach would adequately account for the
capacity which is not used and in this context, the unaccounted profit margins will be traced to
the underutilized capacity. The total value of the underutilized capacity is inclusive of the
expense incurred as a result of machine depreciation. Once this cost has been calculated, it is
possible to develop a good model which will determine the accountability of the individual
resources used in making the capacity.
For instance, failure of the reindeer dolls to use any resources such as shipping, setup costs or
production runs results in an unchanged final costing of the other dolls. This implies that not
using resources does not affect costs of the other brands. However, sharing these costs among

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 G.G TOYS 5

both dolls has an effect on the manufacturing overhead costs of specialty-branded #106 doll and
Geoffrey doll.
Additionally, the company can compute the total cost specific to each driver in every cost pool
after which it will establish the full cost of an individual doll. To calculate the specific cost pool
per doll, the company will multiply the number of driver units with the cost driver per unit and
then add the products together thus getting the total costs per doll.
Do you recommend G.G. Toys produce the Romaine Patch doll? Why or why not ? (Ignore
manufacturing overhead costs including packaging, shipping, and receiving and production
control.)
Assuming that G.G. Toys decided to procure materials from another source other than itself, for
instance from smaller companies, the end result would be a negative contribution margin.
cost per unit (USD) $
8.00
cost of labour (USD) $
3.00
cost of materials (USD) $
-
Contribution Margin (USD) (8 + 0) - 3 = 5
On the flip side, a decision by the company to use scrap metals instead of purchasing raw
materials will result in a positive contribution margin of around five dollars as shown below.
cost per unit (USD) $8
cost of labour (USD) $3
cost of materials (USD) $0
Contribution Margin (USD) $5
From the above illustrations, the company would be profitable by exclusively using scrap metal
in the production of the Romaine Patch doll. The quantity of usable scrap metal determines the
total amount of units to be produced. Therefore, the following reasons justify why the company
should use only scrap metals to produce the Romaine Patch Doll.
 G.G. Toys needs to maximize and leverage on the by-products obtained from making
doll’s pyjamas
 The company should consider its customers who are not able to afford the other brands
available by setting the doll’s prices at an equitable and affordable price (Schreter, 2008).
 If the company decides to recycle waste production materials it stands to gain the
following benefits: corporate recognition, competitive advantage and economies of scale.
Recycling materials also makes the company a responsible and environment friendly
manufacturer.

References
Gallo, A. (2017). Contribution Margin: What It Is, How to Calculate It, and Why You Need It.
Retrieved from https://hbr.org/2017/10/contribution-margin-what-it-is-how-to-calculate-
it-and-why-you-need-it
Schreter, S. (2008). 3 Simple Steps to Improve Profitability. Retrieved from
https://www.entrepreneur.com/article/192140
Woodruff, J. (2018). Traditional Costing Vs. Activity-Based Costing. Retrieved from
https://smallbusiness.chron.com/traditional-costing-vs-activitybased-costing-33724.html

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