This "G.G. Toys" case study highlights issues of accounting and includes a review of excess capacity, product costing, variance analysis, as well as scrap costs.
Dennis Campbell; Susan Kulp
Harvard Business Review (105005-PDF-ENG)
September 15, 2004
Case questions answered:
Case study questions answered in the first solution:
- Do you recommend that G.G. Toys change its existing cost system in the Chicago plant? In the Springfield plant? Why or why not?
- Calculate the cost of a Geoffrey Doll, the Specialty Branded Doll #106, and a cradle using the cost study conclusions.
- 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 to enhance its profitability? What additional information would you like to have to make these recommendations?
Case study questions answered in the second solution:
- Do you recommend that G.G. Toys change its existing cost system in the Chicago plant? In the Springfield plant? Why or why not?
- Calculate the cost of a Geoffrey doll, the specialty-branded doll $106, and a cradle using the cost study conclusions.
- 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 to enhance its profitability? What additional information would you like to have to make these recommendations?
- How should G.G. Toys account for 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?
- What explains the difference between forecasted and actual revenue for the Chicago plant during March of 2000? What other information would you collect to help explain this difference?
- Do you recommend G.G. Toys produce the Romaine Patch doll? Why or why not?
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G.G. Toys Case Answers
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Executive summary – G.G. Toys
With the diversity of product mix, G.G. Toys needs to implement the ABC system for its Chicago plant to reflect the manufacturing intensity of each product line more accurately. The new costing method reveals that the Geoffrey doll, G.G. Toys’ standard product, is becoming more profitable and carrying a high margin of 28%, while the product margin of Specialty 106, a new product line, is significantly low, around 2%.
Based on profitability comparison, recommendations for G.G. Toys’ management include focusing on producing and selling more Geoffrey dolls; reducing the price of Geoffrey dolls to become more competitive; increasing the price of Specialty 106 dolls to achieve higher product margin; or imposing new order policies to reduce batch-related costs of specialty-branded line.
In order to decide which change has the most positive impact, additional information should be considered, including production capacity, reaction to the price change of retailers and customers, and reaction to new order policies of retailers.
Analysis
1. Consideration for implementing a new costing method
a. Chicago plant
Management should consider changing the existing cost system from the traditional costing method to the activity-based costing method in the Chicago plant. Currently, overhead costs are allocated to products using only one rate – a percentage of production-run direct labor cost.
Although using one rate to allocate overhead costs might be easy, simple, and efficient for firms that manufacture only one product, this costing method is not efficient considering the current situation of the Chicago plant: They are producing products with different manufacturing intensities.
Although the specialty-branded line has the same specifications and requires the same equipment and labor as the standard line, it requires extra work for the more-ornate pajama outfits and customization in features (skin tone, eye color, hair color, and hair length).
Therefore, using one rate to allocate overhead costs might not accurately reflect product costs, and thus, management should implement the ABC method for this plant.
b. Springfield plant
Since the plant produced only one model of the cradle by hand, there is no variety in…
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