Introduction:

Geoffrey doll product was G.G. Toys’ most popular and standard doll product. If G.G. Toys’
adopts this new system, the company will be able to increase its standard product’s profit
margins up to 27% along with decreasing its production cost. Under new accounting system,
the profit margin for Geoffrey doll has been increased because previously, the management
allocated the overhead cost on the basis of total labor used regardless of production runs.
Geoffrey dolls requires less production runs, setups and related machine hours. Thus, its
profit margin yielding increase return. Additionally, as the intense competition and retailers’
demand promoted G.G. Toys to provide customize production, the number of sales of
Specialty-Branded doll has been drastically increased. Thus, the management could generate
more revenues with the help of this increased sales of Specialty-Branded doll in despite of its
low profit margins of 3%. However, the increased sale will eventually divided the overhead
cost into all units produced and will helped to increase the overall profit margin.
Problem statement
The company was facing various complications in the production costs as well as in
the product margin that resist the company to maintain the market position 
Case Analysis
1. Do you recommend that G.C toys change its existing cost system in the Chicago
plant? In the spring field plant? Why or why not?
The existing cost system in G.G Toys resists the company to achieve its targeted goals
because of the existing cost system the production cost of standard products increased
so, the company needs to change its existing cost system. As the overhead costs of the
company are high so G.G. Toys need to introduce the appropriate costing system. The
Chicago Plant manufactured both Specialty dolls and Geoffrey dolls so, for the
manufacturing of different types of dolls the company required different machines
and production lines, and for the availability of products in the market the company
also required different and suitable setup and shipment costs. So, the company is
needed to change the traditional costing system because it is not suitable for the
company. 
The traditional or existing cost system of the company is complicated that resists the
company to regulate the overheads. It is very necessary to allocate the different
manufacturing costs on the basis of their respective cost drivers that would regulate
the allocation of the overhead cost. However, according to the existing system, the
manufacturing overheads are allocated on the basis of the production run direct labor
cost. So, for the allocation of overhead costs, there should be a respective cost drive
like a machine hour is the appropriate cost driver for the costs related to the machines.
So, for the Chicago plant, the activity-based costing system is much more appropriate
and suitable than the existing costing system which would determine different
margins on the basis of toys types however, for the Springfield plant the traditional
costing is suitable because it has only 5 percent of overhead costs while it produced
only one cradle.
 2. Calculate the cost of a Geoffrey doll, the specialty branded doll #106, and a cradle
using the cost study conclusions.
The production cost of the company has main components including overheads, labor,
and substantial however the cost of operational expenses are determined on the basis
of the  (Traditional costing system) production run direct labor cost by G.G Toys. For
the determination of operational expenses of each unit (overhead cost), the division of
total overhead cost with the total labor cost is required however for the allocation of
overhead cost the resultant percentage is used. While per unit cost of the Branded doll
was determined as $23.74 and $23.60 was for Cradles however $19.19 was per unit
cost for Geoffrey dolls.
However, on the basis newly introduced accounting system i-e activity-based
accounting system there was a slight difference in the cost as because in the ABC costing
system during the computing the operational cost all required drivers are utilized. So that is
why according to newly introduced accounting system per unit cost of Geoffrey dolls is
around $15.27, $23.72 for Cradles and $34.94 for the specialty brand dolls.
The calculations shows that the price for both Specialty-Branded dolls and Geoffrey dolls are
significantly different as compared to the traditional accounting system values however the
calculated prices of Cradles with both system is remain same so it is determined that the
traditional accounting system is suitable for only cradles it is because of the existing labor
incentive policy of Springfield Plant.

3. Compare and contrast the profitability of each doll under the new and old systems.
Based on your recomputed product costs. What action would you recommend the
company consider to enhance its profitability? What additional information would
you like to have to make these recommendations?
Exhibit 3 compares and contrasts the traditional costing system with the ABC system.
The traditional costing system is appropriate for the cradle production in Springfield
plant, the margin for cradle remains at 21%.

However, the margin for Geoffrey dolls and Specialty branded dolls show
significantly different results under ABC costing. Geoffrey dolls had a 9% margin
under traditional costing. However, the actual cost calculated using ABC costing
shows a margin of 28%. This is because previously too many overhead costs were
allocated to Geoffrey dolls. The production of these Geoffrey dolls requires lesser
production runs, shipments, and setups than Specialty branded dolls. Under the new
costing system, more overhead costs are allocated to the Specialty dolls. Hence, the
margin for specialty dolls is 34% under the current system. ABC costing shows that
actually the margin is only 3%.

Based on the margins calculated through ABC costing, it is obvious that Geoffrey
dolls perform significantly better than the Specialty dolls. Hence, more Geoffrey dolls
should be produced by G.G Toys. The production of Specialty toys should be ceased
in order to increase profitability. Another way to increase profits would be to only
accept large orders for Specialty toys. This is because as production units increase the
fixed overheads are spread on more and more units and the unit cost decreases.
 4. 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 speciality branded dolls in question number 2? Explain your
method and its impact.

Specialty-Branded
  Geoffrey Doll Cradles
Doll
Standard unit cost ($) 15.27 34.94 23.72
Selling price ($) 21.00 36.00 30.00
Margin ($) 27% 3% 21%
       

In March 2000, G.G. Toys decided to manufacture the Reindeer dolls for the months of July
to September in Chicago plant. Additionally, the management expanded its production
capacity for Reindeer dolls’ production along with purchasing more machines and leased
space. The product doll will increase the doll’s product line, this new product will require the
use of more labor and machine hours and will be resulted in increased overall overhead cost.
But this increased cost will be divided among the total unit produced and will help to lower
down each product’s cost eventually. This expanded production will yield more unit
production and will help the organization to earn more revenues. The overall cost of Geoffrey
doll and Specialty-Branded doll will be lowered down because of low overhead cost.
Additionally, during the months of October to June, this expanded production capacity will
be utilized well for the production of the Romaine patch doll and will help to reduce the fixed
cost. To save the cost generated form the Springfield plant, it is recommended that the
company should close this plant and start the cradles’ production in the Chicago plant.
5. What explains the difference between forecasted and actual revenue for the Chicago
plant during march of 2000? For other information would you collect to help explain
this difference?
The actual revenues are the revenues which has been actually earned by the
company while the forecasted revenues are those revenues which has been expected
by the company to be earned by the end of the year. The forecasted revenueshave
been made upon some specific facts and figures such as past revenues’ trends and the
economic demand changing conditions.
In March 2000, the Chicago Plant’s revenues had shown an increased amount
as compared to its forecasted revenues. G.G. Toys’ forecasted a revenue of $765,000
along with the production of 24,900 forecasted units(R Rodgers, P Joyce, 1996). It
could be seen in the G.G. Toys’ 2000 income statement that the G.G. Toys’ earned an
increased revenue. But the production units had been decreased by 900 units. The
management is worried about this production unit decrease. A detailed variance
analysis has been performed in order to determine the fluctuations yielded because of
this decrease. The analysis represents that the increased price variance could offset the
decreased quantity variance and yielded the increased revenues.
Varaince Analysis
   
 Forecasted Revenue       765,000
 Forecasted U
              31
 Actual Quantity        24,000
 Standard Quantityz        24,900
 Price Variance        48,651
 Quantity Variance       (27,651)
 Total Variance        21,000

6. Do you recommend G G Toys produce the romaine patch doll? Why or why not?

In March 2000, G.G. Toys decided to produce the Romaine patch doll in
Chicago plant. It is recommended that G.G. Toys should produce Romaine patch doll
because of will be labor centric and will not require new productions runs and setups.
Additionally, this product will be handmade and requires soft clothes’ material. Its
price has been set up to $8 per unit along with the a per unit material cost of $6 and
the labor cost of $3. This could be seen that this forecasted estimate will yield
negative profit margin. But, G.G. Toys should consider other aspects too. G.G. Toys’
management estimated that the current production yields 20% of scrap material of
pajamas material and this material could be used in the production of the Romaine
patch doll. This is concluded that the material price will become $0 for the Romaine
patch doll production because of the scarp material. Additionally, this will help the
company to earn up to 63% of profit margin.Additionally, the management expanded
its production capacity for Reindeer dolls, this expanded production capacity will be
utilized well from October to June in future.

  Estimates Actual Estimates

Standard unit cost ($)             9                       3
Selling price ($)             8                       8
Margin ($) -13% 63%

Conclusion and recommendation:

G.G. Toys was a top high-quality manufacturer and supplier of dolls in U.S. G.G. Toys
operated under two manufacturing plants- The Chicago Plant and The Springfield plant.
Various types of dolls were produced in Chicago Plant, whereas the other plant was used to
assemble these dolls cradles. The production cost of Geoffrey doll product was increased and
a rapid decline in the Geoffrey doll product was seemed. To cope up with this, the G.G. Toys
recommended change its cost accounting procedure because its standards product’s
production cost has been increased due to this system. ABC cost accounting is an effective
system which will allocate only the respective product’s cost to each product based upon the
machine and labor hours being used