Greetings Inc. has 1,500 stores throughout the United Stateslocated in high-traffic malls.
Company's President in 2008 called for a formal analysis of thecompany's options with regard to business opportunities.
Location was the first issue considered in the analysis. Rentalcosts are high and the intense competition from other stores in themall selling similar merchandise has become a disadvantage. Toincrease revenue, President felt the company would need to add anew product line. To keep costs down, the product line should beone that would not require much additional store space. In order toimprove earnings, should carefully manage the costs of this newproduct line.
The company's management found a product: high-quality unframedand framed prints which customers would pick out prints by viewingthem on wide-screen computer monitors in each store. Orders wouldbe processed and shipped from a central location. Store size didnot have to increase. To offer these products, Greetingsestablished a new e-business unit called Wall Décor, a"profit center"; that is, the manager of the newbusiness unit is responsible for decisions affecting both revenuesand costs.
Wall Décor was designed to distribute unframed and framedprint items to each Greetings store on a just-in-time (JIT) basis.The Wall Décor website allows customers to choose fromseveral hundred prints. The print can be purchased in variousforms: unframed, framed with a metal frame and no matting, orframed with a wood frame and matting. When customer purchase anunframed print, it is packaged and shipped the same day from. Whena customer purchases a framed print, the print is framed at WallDécor and shipped within 48 hours.
Each Greetings store has a computer linked to WallDécor's Web server so Greetings customers can browse to makea selection. Store employees are trained to help customers use thewebsite and complete the purchase. The advantage is each Greetingsstore, through the Wall Décor website, can offer a widevariety of prints, yet the individual Greetings stores do not haveto hold any inventory of prints or framing materials. only cost toindividual store is computer and high-speed line connection to WallDécor. The advantage to customer is the wide variety ofunframed and framed print items that can be conveniently purchasedand delivered to the home or business, or to a third party as agift.
Wall Décor uses traditional job-order costing system thatwould be less complicated, less overhead costs, if it sold onlyunframed prints. Unframed prints require no additional processing,and they can be easily shipped in simple protective tubes. Framingand matting requires the company to have multiple matting colorsand frame styles, which requires considerable warehouse space,skilled employees to assemble the products and more expensivepackaging procedures.
Manufacturing overhead is allocated to each unframed or framedprint, based on the cost of the print. This overhead allocationapproach is based on the assumption that more expensive prints willusually be framed and therefore more overhead costs should be assigned to these items. The predetermined overhead rate is thetotal expected manufacturing overhead divided by the total expectedcost of prints. This method of allocation appeared reasonable tothe accounting team and distribution floor manager. Direct laborcosts for unframed prints consist of picking the prints off the shelf and packaging them for shipment. For framed prints, directlabor costs consist of picking the prints, framing,matting,packaging.
1. What are the advantages and disadvantages of using the costof each print as a manufacturing overhead cost driver?