Accounting - Gg Toys Case Study

Class: MBA 613-401

                                              GG Toys Case Study

1. Do you recommend that GG toys change its existing costing system in the Chicago plant? In the Springfield plant? Why or why not?

The costing systems are essential component of the accounting system employed by various organizations and companies. The two costing systems that are widely used in practice are: 1. The traditional costing system (TCS) and 2. The activity based costing system (ABCS). These systems are applied in estimating the products cost in different circumstances. In the traditional system, the overhead cost of the product is usually assigned based on the relative use of direct labor. This frequently leads to an inaccurate reporting of the actual product cost. The system sticks to the fact that whenever a product is manufactured a cost is incurred. This might be accurately applicable for certain direct costs. In the meantime, it lacks accuracy for activities not performed directly on the product units. Therefore, the traditional methodology assigns the cost directly to the product instead of to activities first and then to the product. In the activity based costing method, costs of products are assigned to activities. It is based on the consumption of the resources utilized by the production process. Thus, the product cost is worked out from the activities at each line of production.

In the case scenario of GG toys, I recommend that the company changes its costing system in the Chicago plant from the traditional system that is currently used to the activity based method. The reasons for my decision is the following: In allocating the overhead as a percentage of direct labor cost, the margin of 9% and 34% in case of Geoffrey doll and specialty branded doll#106 will not reflect the true cost of overhead. We see a very high manufacturing overhead at the Chicago plant that comes to about 95% of the total manufacturing overhead at the GG toys company. In the production process of the three different items of toys, we require different numbers of machine hours and other variable costs. By applying the activity based costing system we are in a better position for allocating the manufacturing overhead for each item of toys produced. This will enable us to have a more accurate analysis for the profit margin of each toy. Other advantages for using the ABCS is that it provides a better management, performance evaluation and budgeting. It can be further utilized in making decisions for new technology investment.

Regarding the Springfield plant and its current costing system, I recommend that they keep the current costing system as it is. This plant manufactures one product only, the cradles. The company buys finished components and assembles them manually, so there are no machine hours.

2. calculate the cost of Geoffrey doll, the specialty brandeddoll#106,and cradle using the cost study conclusions.

                                                               Geoffrey Doll          Specialty branded Doll#106         Cradles