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Gg Toys

In: Business and Management

Submitted By kundraa
Words 919
Pages 4
To: Audrey Hausner
From: Heather Varez HV
Subject: G.G. Toys Internal Cost Study and Costing Methods
Date: Tuesday, December 09, 2008

The internal cost study has brought up issues of costs related to alternative drivers for the machine related expenses, increased setups, production runs and work in packaging and shipping.
Cost System Recommendation
I recommend that G.G. Toys institute an Activity Based Costing (ABC) system in their Chicago plant. In allocating overhead as a percentage of direct labor cost, the margins of 9% and 34% in the Geoffrey doll and the specialty branded doll #106 respectively, do not reflect the true cost of manufacturing.
When using the ABC system, we see that a tremendous misallocation in “Receiving and Production Control” and in “Packaging and Shipping” occurred using the previous system. These skewed allocations of costs also distorted the margins as shown below.

Comparison of Alternative Costing Approaches | | | | | | Unit Overhead Cost | | Geoffrey Doll | | Specialty #106 | Volume-based | | $11.19 | | $13.99 | Activity-based | | 7.22 | | 25.01 | Difference | | $3.97 | | $11.02 | Unit Margin | | | | | Volume-based | | 1.81 | | $12.26 | Activity-based | | 5.78 | | 1.24 | Difference | | $3.97 | | $11.02 | Return on Sales | | | | | Volume-based | | 8.62% | | 34.06% | Activity-based | | 27.51% | | 3.43% | Difference | | 18.89% | | 30.62% |

If G.G. can reduce the number of shipments and increase the size of the production runs of the #106 doll, the margin will increase dramatically. It may be a good idea to instate minimum orders.
In the Springfield plant, the ABC system is unnecessary because all costs are allocated to the production of a single product.
Holiday Doll Production
In regards to producing the holiday reindeer dolls, it seems that

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