Overhead Exercise

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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-traffic malls.

As the stock price of many other companies soared, Greetings' stock price remained flat. As a result of a heated 2007 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 2008 Mr. Burns called for a formal analysis of the company's options with regard to business opportunities.

Location was the first issue considered in the analysis. Greetings stores are located in high-traffic malls where …show more content…

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 floor 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 on the next page 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

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