Benefits of Activity Based Costing System
There is need for GG toys t change its existing cost system in the Chicago plant and Springfield plant as the overheads are allocated in the basis of the historical coat accounting system but it will be better for the company to use Activity Based Costing system for allocation of overheads that will increase the profitability of the company.
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Calculation of Cost
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Geoffrey Doll
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Doll #106
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Other speciality Dolls
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Cradles
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Production (Units)
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7,500.00
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4,000.00
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12,500.00
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3,000.00
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Machine Hours
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3,750.00
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1,200.00
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6,250.00
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–
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Setups
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10.00
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100.00
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50.00
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–
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Production runs
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10.00
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100.00
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50.00
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1.00
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Number of shipments
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10.00
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220.00
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70.00
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50.00
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Direct Labour hours
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1,500.00
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1,000.00
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3,125.00
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1,500.00
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Chicago
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Geoffrey Doll
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Doll #106
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Other speciality Dolls
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Springfield(Cradles)
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Material Cost
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1,36,500.00
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37,500.00
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24,000.00
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75,000.00
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36,000.00
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Machine Related
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1,12,000.00
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37,500.00
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12,000.00
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62,500.00
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Setup Labour
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13,333.00
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833.31
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8,333.13
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4,166.56
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Receiving and Production run
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60,000.00
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3,750.00
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37,500.00
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18,750.00
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3,000.00
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Packaging and shipping
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50,000.00
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1,666.67
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36,666.67
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11,666.67
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3,000.00
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Plant management and facilities related
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33,333.00
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8,888.80
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5,925.87
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18,518.33
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6,667.00
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Total Cost
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4,05,166.00
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90,138.78
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1,24,425.66
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1,90,601.56
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48,667.00
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Production (Units)
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7500
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4000
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12500
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3000
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Total unit cost
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12.02
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31.11
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15.25
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16.22
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As per ABC Costing System
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Geoffrey doll
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Doll #106
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Speciality Branded Dolls
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Cradles
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Total Cost
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90,138.78
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1,24,425.66
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1,90,601.56
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48,667.00
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Production (Units)
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7500
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4000
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12500
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3000
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Total unit cost
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12.02
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31.11
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15.25
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16.22
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Selling Price
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21
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36
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38.76
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30.00
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Profit
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8.98
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4.89
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23.51
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13.78
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As per Historical Cost Method
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Geoffrey Doll
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Doll #106
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Cradles
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Direct labour cost
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3.00
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3.75
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7.50
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Direct Material Cost
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5.00
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6.00
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12.00
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Manufacturing overhead
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11.19
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13.99
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4.20
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Total unit Cost
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19.19
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23.74
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23.70
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Selling price
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21.00
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36.00
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30.00
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Profit
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1.81
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12.26
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6.30
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The profit of Geoffrey Doll is less in the new method as compared to the old method, the profit of speciality branded doll is more in the new method as compared to the old method. The profit of Cradles is less as compared to the old method. Hence, they should implement the new method for the specialised branded dolls and continue with the old method for the other two.
The company expanded its production capacity by acquiring the new machines and leased space for the production of holiday reindeer dolls. The reindeer dolls are produced only in the months of July, August and September and for the rest of the months the space and other infrastructure will be ideal. The company need to bear the cost of maintain the space for ideal months that will increase the cost of the company as the output and revenue in those ideal months will be less. The company can opt for producing it but provided that it will not incur any additional cot for the reindeer doll as their production and demand is only for 3 months and for rest of the months no additional revenue will be there. The overhead cost is also allocated as per the Activity Based costing System because product based costing system will help in perfect allocation of the cost on the basis of the product.
The forecasted revenue of Chicago plant was 765000 but the actual revenue was 786000 on the other hand forecasted production of the Chicago was 24600 but actually they did produce only 24000 still they have surplus revenue over and above the forecasted ones. The revenue is more than the forecasted ones because of the method of costing used by them as they allocated overheads on the basis of labour hours rather then on the basis of the activities. The company increased per unit sales price that lead to an increase in the revenue of the Chicago division.
The company should not opt for producing the romaine Patch Doll because that will increase the cost of the company and the selling price of the doll is less than its cost of production that will increase the loss of the company. Irrespective of the fact that the waste is used for the production of Patch Doll but still it is not contributing anything for their increase in the profit of the company. Hence company should not opt for producing the romaine Patch Doll.
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