Question

In: Accounting

Greetings Inc. has operated for many years as a nationally recognized retailer of greeting cards and...

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-traffi c malls.

As the stock price of many other companies soared, Greetings’ stock price

remained fl at. 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 company’s options with regard to business opportunities.

Location was the fi rst issue considered in the analysis. Greetings stores are

located in high-traffi c malls where rental costs are high. The additional rental

cost was justifi ed, 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 would need 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 company’s management

found a product that seemed to be a very good strategic fi t 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 widescreen

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 Décor.

Wall Décor is a “profi t center”; that is, the manager of the new business unit is

responsible for decisions affecting both revenues and costs.

Wall Décor was designed to distribute unframed and framed print items

to each Greetings store on a just-in-time (JIT) basis. The system works as follows:

The Wall Décor website allows customers to choose from several hundred

prints. The print can be purchased in various forms: unframed, framed with a

steel 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 Décor. When a customer purchases a framed print, the print is framed

at Wall Décor and shipped within 48 hours.

Each Greetings store has a computer linked to Wall Décor’s Web server so

Greetings’ customers can browse the 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 to shop and to complete

their purchases. The advantage to this approach is that each Greetings store,

through the Wall Décor website, can offer a wide variety of prints, yet the individual

Greetings stores do not have to hold any inventory of prints or framing

materials. About the only cost to the individual store is the computer and highspeed

line connection to Wall Décor. 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 Décor uses a traditional job order costing system. Operation of Wall

Décor would be substantially less complicated, and overhead costs would be

substantially less, if it sold only unframed prints. Unframed prints require 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 the cost of the print. This overhead allocation approach is based on the assumption

that more expensive prints 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 fl oor manager. Direct labor costs for unframed prints

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 in Illustration CA 1-1 for unframed and framed prints was

collected by the accounting and production teams. The manufacturing overhead

budget is presented in Illustration CA 1-2.

Illustration CA 1-1

Information about prints and

framed items for Wall Décor

Unframed Steel-Framed

Steel-Framed Print-Nomatting

Wood-Framed Print, with Matting

Volume—expected units Sold

8000

15000

7000

Cost Elements

Direct materials Print (expected average) cost for each of the three categories)

$12

$16

$20

Frame and glass

4

6

Matting

4

Direct labor

Picking time

10 minutes

10 minutes

10 minutes

Picking labor rate/hour

$12

$12

$12

Matting and framing time

20 minutes

30 minutes

Matting and framing

rate/hour

$21

$21

Illustration CA 1-2

Manufacturing overhead

budget for Wall Décor

Manufacturing Overhead Budget

Supervisory salaries

$100,000

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

$375,200

Solutions

Expert Solution

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Greetings Inc.
Calculation of direct material cost per unit
Particulars Unframed Steel-Framed Steel-Framed Print-No matting Wood-Framed Print, with Matting Note
Direct labor
Picking time (minutes)                                    10.00                                                10.00                                                       10.00 A
Picking labor rate/hour                                    12.00                                                12.00                                                       12.00 B
Picking cost per unit                                      2.00                                                  2.00                                                         2.00 C=B/60*A
Matting and framing time                                                20.00                                                       30.00 D
Matting and framing rate/hour                                                21.00                                                       21.00 E
Matting and framing cost per unit                                                  7.00                                                       10.50 F=E/60*D
Calculation of total cost Unframed Steel-Framed Steel-Framed Print-No matting Wood-Framed Print, with Matting Total
Picking cost per unit                                      2.00                                                  2.00                                                         2.00 See C
Matting and framing cost per unit                                                  7.00                                                       10.50 See F
Direct materials Print                                    12.00                                                16.00                                                       20.00 G
Total cost per unit                                    14.00                                                25.00                                                       32.50 H=C+F+G
Volume—expected units Sold                              8,000.00                                        15,000.00                                                 7,000.00 I
Total expected cost $                     112,000.00 $                                 375,000.00 $                                        227,500.00 $ 714,500.00 J=H*I
Calculation of predetermined overhead rate
Particulars Amount $
Budgeted total manufacturing overhead costs                          375,200.00 K
Total expected cost                          714,500.00 J
Predetermined overhead rate $                                  0.53 L=K/J
Allocation of manufacturing overhead costs Unframed Steel-Framed Steel-Framed Print-No matting Wood-Framed Print, with Matting Total
Total expected cost                          112,000.00                                      375,000.00                                             227,500.00     714,500.00 J
Predetermined overhead rate                                      0.53                                                  0.53                                                         0.53 L
Manufacturing overhead costs Allocated                            58,813.72                                     196,920.92                                             119,465.36     375,200.00 M=J*L

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