CASE #4: G.G. Toys

1. Do you recommend that G.G. Toys change its existing cost system in the Chicago plant? In the Springfield plant? Why or why not?
G.G. Toys should change its existing cost accounting system from traditional costing to activity-based costing (ABC) in the Chicago plant as it is allocating its entire manufacturing overhead on the basis of just one cost driver: production run direct labor cost.
Since overhead at the Chicago plant is high, accurate cost accounting system is required. Different types of dolls require different amounts of machine hours, setups, production runs, shipments, etc. By using ABC, different manufacturing overhead would be allocated to each type of doll, giving result to different contribution …show more content…
However, if they share the same cost pools, it would impact the overhead cost allocated to Geoffrey Doll and Specialty Doll #106. We would recalculate the cost per driver unit for each cost pool. Then, for each cost pool for a particular doll, we would multiply the corresponding cost driver per unit with the driver units and sum them up to find the total cost a particular doll. To derive the per unit overhead cost for that doll, we would divide the total cost by the number of units produced.

5. 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? Actual Budgeted
Number of Units 24,000 24,900
Revenue $786,000 $765,000

Variance Analysis:
AP = 786,000 / 24,000 = $32.75
SP = 765,000 / 24,900 = $30.73
AQ = 32,000
SQ = 24,900

Price Variance = (AP - SP) AQ = (32.75-30.73) x 24,000 = $48,480.00 F
Quantity Variance = (AQ - SQ) SP = (24,000-24,900) x 30.73 = $(27,657.00) U
Total Variance = PV + QV = $20,823 F

Even though the actual number of units produced was less than budgeted, the actual revenue was higher due to the favorable price variance. It may be that dolls were sold at a greater price than was budgeted, or perhaps more dolls whose sales price is greater were sold than dolls whose sales price is