Greetings Inc.: Activity-Based Costing
Developed by Thomas L. Zeller, Loyola University Chicago, and Paul D. Kimmel, University of Wisconsin–Milwaukee
The Business Situation
Mr. Burns, president of Greetings Inc., created the Wall Décor unit of Greetings three years ago to increase the company’s revenue and proﬁts. Unfortunately, even though Wall Décor’s revenues have grown quickly, Greetings appears to be losing money on Wall Décor. Mr. Burns has hired you to provide consulting services to Wall Décor’s management. Your assignment is to make Wall Décor a proﬁtable business unit. Your ﬁrst step is to talk with the Wall Décor work force. From your conversations ...view middle of the document...
The price competition in the malls is very intense. On average, stores ﬁnd that the proﬁts on unframed prints are very low because the cost for unframed prints charged by Wall Décor to the Greetings stores is only slightly below what competing stores charge their customers for unframed prints. As a result, the proﬁt margin on unframed prints is very low, and the overall proﬁt earned is small, even with the large volume of prints sold. In contrast, stores make a very good proﬁt on framed prints and still beat the nearest competitor’s price by about 15%. That is, the mall competitors cannot meet at a competitive price the quality of framed prints provided by the Greetings stores. As a result, store managers advertise the lowest prices in town for high-quality framed prints. One store manager referred to Wall Décor’s computer on the counter as a “cash machine” for framed prints and a “lemonade stand” for unframed prints. In a conversation with the production manager, you learned that she believes that the relative proﬁtability of framed and unframed prints is distorted because
case 2 Cases for Management Decision-Making
of improper product costing. She feels that the costs provided by the company’s traditional job order costing system are inaccurate. From the very beginning, she has carefully managed production and distribution costs. She explains, “Wall Décor is essentially giving away expensive framed prints, and it appears that it is charging the stores too much for unframed prints.” In her ofﬁce she shows you her own product costing system, which supports her point of view. Your tour of the information technology (IT) department provided additional insight as to why Wall Décor is having ﬁnancial problems. You discovered that to keep the website running requires separate computer servers and several information technology professionals. Two separate activities are occurring in the technology area. First, purchasing professionals and IT professionals spend many hours managing thousands of prints and frame and matting materials. Their tasks include selecting the prints and the types of framing material to sell. They also must upload, manage, and download prints and framing material onto and off of the website. The IT staff tells you much of their time is spent with framing and matting material. Only a highly skilled IT professional can properly scan a print and load it up to the site so that it graphically represents what the print will look like when properly matted and framed. In addition, you discover that a different team of IT professionals is dedicated to optimizing the operating performance of the website. These costs are classiﬁed as manufacturing overhead because a substantial amount of work is required to keep the site integrated with purchasing and production and to safeguard Wall Décor’s assets online. Most time-consuming is the effort to develop and maintain the site so that customers can view the...