rGreetings Inc.: Job Order Costing

Developed by Thomas L. Zeller, Loyola University Chicago, and Paul D. Kimmel,

University of WisconsinMilwaukee

The Business Situation

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 companys 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 companys 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 Dcor.

Wall Dcor is a profi t center; that is, the manager of the new business unit is

responsible for decisions affecting both revenues and costs.

Wall Dcor 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 Dcor 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 Dcor. When a customer purchases a framed print, the print is framed

at Wall Dcor and shipped within 48 hours.

Each Greetings store has a computer linked to Wall Dcors 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 Dcor 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 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 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 Dcor

	Unframed Steel-Framed	Steel-Framed Print-Nomatting	Wood-Framed Print, with Matting
Volumeexpected 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 Dcor

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

Instructions

Use the information in the case and your reading from the discussed chapter of the text

to answer each of the following questions.

1. Define and explain the meaning of a predetermined manufacturing overhead rate that

is applied in a job order costing system.

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

3. Using the information in Illustrations CA 1-1 and CA 1-2, compute and interpret the

predetermined manufacturing overhead rate for Wall Dcor.

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

(a) Lance Armstrong unframed print (base cost of print $12).

(b) John Elway print in steel frame, no mat (base cost of print $16).

(c) Lambeau Field print in wood frame with mat (base cost of print $20).

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

(b) How much of the total overhead cost is expected to be allocated to steel-framed

prints?

(c) How much of the total overhead cost is expected to be allocated to wood-framed

prints?

(d) What percentage of the total overhead cost is expected to be allocated to unframed

prints?

6. Do you think the amount of overhead allocated to the three product categories is reasonable?

Relate your response to this question to your fi ndings in previous questions.

7. Anticipate business problems that may result from allocating manufacturing overhead

based on the cost of the prints.