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Gg Toys Essay

919 words - 4 pages

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 ...view middle of the document...

Therefore, in the months the dolls are produced, the manufacturing overhead should be allocated through ABC in the same manner as the Geoffrey and the #106. Allocating costs in such a way, those related to runs and setups should be low barring a need to shift machinery back to producing the other dolls frequently. Given that additional space and machinery has been obtained, this would not be likely. It is the plant management and facilities allocation that may prove to drive the margin on these dolls down.
As for how to use the excess capacity when the space lies idle from October through June, I have reservations in producing the “Romaine Patch” doll. This doll does not utilize the machinery bought for the reindeer doll and while it may use scrap from the specialty dolls, the labor involved may negate any savings. I would suggest looking into using this machinery for other plastic based holiday specialty dolls for instance cherubs for Valentines Day or a monster for Halloween.
Variance Analysis
Without information on the expected mix in production of the Geoffrey and other specialty branded dolls, it is difficult to trace down difference in expected sales and actual sales. However, we can see a favorable variance in direct labor and an unfavorable variance in direct materials. Still, this only explains a portion of variance in budgeted and actual sales (see Exhibit Variance Analysis below). The question of what caused an increase in sales despite a decrease in production is unclear. It could be explained by an increase in the production and sales of specialty branded dolls which have a higher margin than the Geoffrey. Another possibility is that there was inventory held from the previous month and sold in this month moderating the decline in production. Please note, a sales price for other specialty dolls was not given. If we assume the sales figures were for...

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