80.2K

Verified Solution

Link Copied!

Greetings Inc. has operated for many years as a nationally recognized retailer of greeting cards and small gift items. It has 1,500 stores throughout the United States located in high-traffic malls. As the stock price of many other companies soared, Greetings stock price remained flat. As a result of a heated 2013 shareholders meeting, the president of Greetings, Robert Burns, came under pressure from shareholders to grow Greetings stock value. As a consequence of this pressure, in 2014 Mr. Burns called for a formal analysis of the companys options with regard to business opportunities.

Location was the first issue considered in the analysis. Greetings stores are located in high-traffic malls where rental costs are high. The additional rental cost was justified, however, by the revenue that resulted from these highly visible locations. In recent years, though, the intense competition from other stores in the mall selling similar merchandise has become a disadvantage of the mall locations.

Mr. Burns felt that to increase revenue in the mall locations, Greetings would need to attract new customers and sell more goods to repeat customers. In order to do this, the company needs to add a new product line. However, to keep costs down, the product line should be one that would not require much additional store space. In order to improve earnings, rather than just increase revenues. Greetings would have to carefully manage the costs of this new product line.

After careful consideration of many possible products, the companys management found a product that seemed to be a very good strategic fit for its existing products: high-quality unframed and framed prints. The critical element of this plan was that customers would pick out prints by viewing them on wide-screen computer monitors in each store. Orders would be processed and shipped from a central location. Thus, store size would not have to increase at all. To offer these products, Greetings established a new e-business unit called Wall Dcor. Wall Dcor is a profit center, that is, the manager of the new business unit is responsible for the decision affecting both revenue and costs.

Wall Dcor was designed to distributing unframed and framed print items to each Greeting store on a just-in-time (JIT) basis. The system works as follows: The Wall Dcor website allows customer to choose from several hundred prints. The print can be purchased in various forms: unframed, framed with a metal frame and no matting, or framed with a wood frame and matting. When a customer purchases an unframed print, it is packaged and shipped the same day from Wall Dcor. When a customer purchases a framed print, the print is framed at Wall Dcor and shipped within 48 hours.

Each Greeting store has a computer linked to Wall Dcor Web server so Greetings customers can browse many options to make a selection. Once a selection is made, the customer can complete the order immediately. Store employees are trained to help customers use the website and complete the purchase. The advantage to this approach is that each Greetings store, through the Wall Dcor website, can offer a wide variety of prints, yet the individual Greetings stores don have to hold any inventory of prints or framing materials. About the only cost to the individual store is the computer and high-speed line connection to Wall Dcor. The advantage to the customer is the wide variety of unframed and framed print items that can be conveniently purchased and delivered to the home or business, or to a third party as a gift.

Wall Dcor uses a traditional job-order costing system. Operation of Wall Dcor would be substantially less complicated, and overhead costs would be substantially less, if it sold only unframed prints. Unframed prints required no additional processing, and they can be easily shipped in simple protective tubes. Framing and matting requires the company to have multiple matting colors and frame styles, which requires considerable warehouse space. It also requires skilled employees to assemble the products and more expensive packaging procedures.

Manufacturing overhead is allocated to each unframed or framed print, based on cost of the print. This overhead allocation approach is based on the assumption that more expensive print will usually be framed and therefore more overhead costs should be assigned to these items. The predetermined overhead rate is the total expected manufacturing overhead divided by the total expected cost of prints. This method of allocation appeared reasonable to the accounting team and distribution floor manager. Direct labor costs for unframed print consist of picking the prints off the shelf and packaging them for shipment. For framed prints, direct labor costs consist of picking the prints, framing, matting, and packaging.

The information on illustration 1-1 for unframed and framed print was collected by the accounting and production teams. The manufacturing overhead budget is presented in Exhibit 1-2 below.

Illustration 1-1

	Unframed Print	Steel-Framed Print, No Matting	Wood-Framed Print, with Matting
Volume expected units sold	80,000	15,000	7,000
Cost Elements
Direct Materials
Print	P12	P16	P20
Frame and glass		P4	P6
Matting			P4
Direct Labor
Picking time	10 minutes	10 minutes	10 minutes
Picking labor rate /hour	P12	P12	P12
Matting and framing time		20 minutes	30 minutes
Matting and framing rate/hour		P21	P21

Illustration 1-2

Manufacturing Overhead Budget
Supervisory salaries	P100,000
Factory rent	130,200
Equipment rent (framing and matting equipment)	50,000
Utilities	20,000
Insurance	10,000
Information technology	50,000
Building maintenance	11,000
Equipment Maintenance	4,000
Budgeted total manufacturing overhead costs	P375,200

1. Define and explained the meaning of a predetermined manufacturing overhead rate that is applied in a job-order costing system.

2. What are the advantage and disadvantages of using the cost of each print as a manufacturing overhead, cost driver?

3. Using the information Exhibit 1-1 and 1-2, compute and interpret the predetermined manufacturing overhead rate for Wall Dcor.

4. Compute the product cost for the following three items:

- Lance Armstrong unframed print (base cost of print P12)

- John Elway print in steel frame, no mat (base cost of print P16)

- Lambeau Filed print in wood frame with mat (base cost of print P20)

5. How much of the total overhead cost is expected to be allocated to unframed prints?

6. How much of the total overhead cost is expected to be allocated to steel framed prints?

7. How much of the total overhead cost is expected to be allocated to wood framed prints?

8. What percentage of the total overhead cost is expected to be allocated to unframed prints?

9. Do you think the amount of overhead allocated to the three product categories is reasonable? Relate your response to this question to your findings in previous questions.

10. Anticipate business problems that may result from allocating manufacturing overhead based on the cost of the prints.

THANK YOU!

Answer & Explanation Solved by verified expert

See Answer