accounting-This case is the first in a series of four cases that presents

Cases for
Management
Decision-Making

CA-1

Suggested Uses of Cases
Case

Overview

CASE 1

This case is the ?rst in a series of four cases that presents a
business situation in which a traditional retailer decides to
employ Internet technology to expand its sales opportunities.
It requires the student to employ traditional job order costing techniques and then requests an evaluation of the resulting product costs. (Related to Chapter 15, Job Order Costing.)

Greetings Inc.:
Job Order Costing

CASE 2
Greetings Inc.:
Activity-Based
Costing

CASE 3
Greetings Inc.:
Transfer Pricing
Issues

CASE 4
Greetings Inc.:
Capital
Budgeting

CASE 5
Auburn Circular
Club Pro Rodeo
Roundup

CASE 6
Sweats Galore,
Inc.

CASE 7
Armstrong
Helmet
Company

CA-2

This case focuses on decision-making bene?ts of activitybased costing relative to the traditional approach. It also
offers an opportunity to discuss the cost/bene?t trade-off
between simple ABC systems versus re?ned systems, and the
potential bene?t of using capacity rather than expected sales
when allocating ?xed overhead costs. (Related to Chapter 17,
Activity-Based Costing.)
This case illustrates the importance of proper transfer pricing for decision-making as well as performance evaluation.
The student is required to evaluate pro?tability using two
different transfer pricing approaches and comment on the
terms of the proposed transfer pricing agreement. (Related
to Appendix J, Pricing.)
This case is set in an environment in which the company is
searching for new opportunities for growth. It requires evaluation of a proposal based on initial estimates as well as sensitivity analysis. It also requires evaluation of the underlying
assumptions used in the analysis. (Related to Chapter 24,
Planning for Capital Investments.)
This comprehensive case is designed to be used as a capstone activity at the end of the course. It deals with a not-forpro?t service company. The case involves many managerial
accounting issues that would be common for a start-up business. (Related to Chapter 18, Cost-Volume-Pro?t; Chapter 20,
Incremental Analysis; and Chapter 21, Budgetary Planning.)
This case focuses on setting up a new business. In planning
for this new business, the preparation of budgets is emphasized. In addition, an understanding of cost-volume-pro?t
relationships is required. (Related to Chapter 18, Cost-VolumePro?t, and Chapter 21, Budgetary Planning.)
This comprehensive case involves ?nding the cost for a
given product. In addition, it explores cost-volume-pro?t
relationships. It requires the preparation of a set of budgets.
(Related to Chapter 14, Managerial Accounting; Chapter 18,
Cost-Volume-Pro?t; Chapter 21, Budgetary Planning; Chapter 22, Budgetary Control and Responsibility Accounting;
Chapter 23, Standard Costs and Balanced Scorecard; and
Chapter 24, Planning for Capital Investments.)

Case 1

Greetings Inc.
Greetings Inc.: Job Order Costing
Developed by Thomas L. Zeller, Loyola University Chicago, and Paul D. Kimmel,
University of Wisconsin–Milwaukee

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-traf?c malls.
As the stock price of many other companies soared, Greetings’ stock price
remained ?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 ?rst issue considered in the analysis. Greetings stores are
located in high-traf?c malls where rental costs are high. The additional rental
cost was justi?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 ?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 “pro?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

CA-3

CA-4

Greetings

case 1 Cases for Management Decision-Making

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 ?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
Print
Volume—expected units
sold

Steel-Framed Print,
No Matting

Wood-Framed Print,
with Matting

80,000

15,000

7,000

$16

$20

$4

$6
$4

10 minutes
$12
20 minutes

10 minutes
$12
30 minutes

$21

$21

Cost Elements
Direct materials
Print (expected average
$12
cost for each of the
three categories)
Frame and glass
Matting
Direct labor
Picking time
10 minutes
Picking labor rate/hour
$12
Matting and framing time
Matting and framing
rate/hour

case 1 Cases for Management Decision-Making

Greet ings

Manufacturing Overhead Budget
Supervisory salaries
Factory rent
Equipment rent (framing and matting equipment)
Utilities
Insurance
Information technology
Building maintenance
Equipment maintenance

$100,000
130,200
50,000
20,000
10,000
50,000
11,000
4,000

Budgeted total manufacturing overhead costs

$375,200

Instructions
Use the information in the case and your reading from Chapters 14 and 15 of the text
to answer each of the following questions.
1. De?ne 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 Décor.
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 ?ndings in previous questions.
7. Anticipate business problems that may result from allocating manufacturing overhead
based on the cost of the prints.

CA-5

Illustration CA 1-2
Manufacturing overhead
budget for Wall Décor

Case 2

Greetings Inc.
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 pro?ts. 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 pro?table business unit.
Your ?rst step is to talk with the Wall Décor work force. From your conversations with store managers you learn that the individual Greetings stores are
very happy with the Wall Décor arrangement. The stores are generating additional
sales revenue from the sale of unframed and framed prints. They are especially
enthusiastic about this revenue source because the online nature of the product
enables them to generate revenue without the additional cost of carrying inventory. Wall Décor sells unframed and framed prints to each store at product cost
plus 20%. A 20% markup on products is a standard policy of all Greetings intercompany transactions. Each store is allowed to add an additional markup to the
unframed and framed print items according to market pressures. That is, the selling price charged by each store for unframed and framed prints is determined by
each store manager. This policy ensures competitive pricing in the respective store
locations, an important business issue because of the intense mall competition.
While the store managers are generally happy with the Wall Décor products,
they have noted a signi?cant difference in the sales performance of the unframed
prints and the framed prints. They ?nd it dif?cult to sell unframed prints at a
competitive price. The price competition in the malls is very intense. On average,
stores ?nd that the pro?ts 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 pro?t margin on unframed prints is very low, and the overall pro?t
earned is small, even with the large volume of prints sold. In contrast, stores
make a very good pro?t 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 pro?tability of framed and unframed prints is distorted because

CA-6

case 2 Cases for Management Decision-Making

Greetings

CA-7

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 of?ce 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 ?nancial 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 classi?ed
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 prints as they would appear either unframed or framed and matted.
A discussion with the IT professionals suggests that the time spent developing and maintaining the site for the unframed prints is considerably less than
that required for the framed prints and in particular for the framed and matted
prints. Developing and maintaining a site that can display the unframed prints
is relatively straightforward. It becomes more complicated when the site must
allow the customer to view every possible combination of print with every type
of steel frame, and immensely more complicated when one considers all of the
possible wood frames and different matting colors. Obviously, a very substantial
portion of the IT professionals’ time and resources is required to present the over
1,000 different framing and matting options.
Based on your preliminary ?ndings, you have decided that the company’s
ability to measure and evaluate the pro?tability of individual products would be
improved if the company employed an activity-based costing (ABC) system. As
a ?rst step in this effort, you compiled a list of costs, activities, and values. Your
work consisted of taking the original manufacturing overhead cost ($375,200,
provided in Case 1) and allocating the costs to activities. You identi?ed four
activities: picking prints; inventory selection and management (includes general
management and overhead); website optimization; and framing and matting cost
(includes equipment, insurance, rent, and supervisor’s salary).
The ?rst activity is picking prints. The estimated overhead related to this
activity is $30,600. The cost driver for this activity is the number of prints. It is
expected that the total number of prints will be 102,000. This is the sum of 80,000
unframed, 15,000 steel-framed, and 7,000 wood-framed.

Activity

Cost Driver

Estimated
Overhead

Picking prints

Number of prints

$30,600

Expected Use of
Cost Driver
(80,000 ? 15,000 ? 7,000) ?
102,000 prints

Illustration CA 2-1
Information for activity 1

CA-8

Greetings

case 2 Cases for Management Decision-Making

The second activity is inventory selection and management. The estimated
overhead related to this activity is $91,700. The cost driver for this activity is the
number of components per print item. An unframed print has one component,
a steel-framed print has two components (the print and the frame), and a woodframed print has three components (the print, the mat, and the frame). The total
number of components is expected to be 131,000.
Illustration CA 2-2
Information for activity 2

Activity

Cost Driver

Inventory
Number of
selection and
components:
management Print (1)
Print and frame (2)
Print, mat, and frame (3)

Estimated
Overhead

Expected Use of
Cost Driver

$91,700

Prints: 80,000 components
Print and frame: 15,000 3 2 5
30,000 components
Print, mat, and frame:
7,000 3 3 5 21,000
components
Total 5 131,000 components

The third activity is website optimization. The total overhead cost related to
website optimization is expected to be $129,000. It was dif?cult to identify a cost
driver that directly related website optimization to the products. In order to re?ect the fact that the majority of the time spent on this activity related to framed
prints, you ?rst split the cost of website optimization between unframed prints
and framed prints. Based on your discussion with the IT professionals, you determined that they spend roughly one-?fth of their time developing and maintaining the site for unframed prints, and the other four-?fths of their time on framed
prints, even though the number of framed prints sold is substantially less than the
number of unframed prints. As a consequence, you allocated $25,800 of the overhead costs related to website optimization to unframed prints and $103,200 to
framed prints. You contemplated having three categories (unframed, steel-framed,
and wood-framed with matting), but chose not to add this additional re?nement.
Illustration CA 2-3
Information for activity 3

Activity
Website
optimization:
Unframed

Framed

Estimated
Overhead

Expected Use of
Cost Driver

Number of prints
at capacity

$ 25,800

Number of prints
at capacity

$103,200

Unframed prints:
100,000 print
capacity
Framed and/or
matted prints:
25,000 print
capacity (16,000
steel; 9,000 wood)

Cost Driver

Once the $129,000 of the third activity was allocated across the two broad
product categories, the number of prints at operating capacity was used as the
cost driver. Note that operating capacity was used instead of expected units sold.
The overhead costs related to website optimization are relatively ?xed because
the employees are salaried. If a ?xed cost is allocated using a value that varies
from period to period (like expected sales), then the cost per unit will vary from
period to period. When allocating ?xed costs it is better to use a base that does
not vary as much, such as operating capacity. The advantage of using operating
capacity as the base is that it keeps the ?xed costs per unit stable over time.

case 2 Cases for Management Decision-Making

Greetings

CA-9

The ?nal activity is framing and matting. The expected overhead costs related
to framing and matting are $123,900. None of this overhead cost should be allocated to unframed prints. The costs related to framing and matting are relatively
?xed because the costs relate to equipment and other costs that do not vary with
sales volume. As a consequence, like website optimization, you chose to base the
cost driver on levels at operating capacity, rather than at the expected sales level.
The cost driver is the number of components. Steel-framed prints have two components (the print and frame), and wood-framed prints have three components
(the print, mat, and frame). The total components at operating capacity would
be steel frame 32,000 (or 16,000 3 2) and wood frame 27,000 (or 9,000 3 3,000).
Illustration CA 2-4
Information for activity 4

Estimated
Overhead

Activity

Cost Driver

Framing and
matting cost
(equipment,
insurance, rent,
and supervisory
labor)

Expected Use of
Cost Driver

$123,900

Print and frame: 16,000 3 2 5
32,000 components at capacity
Print, mat, and frame: 9,000 3
3 5 27,000 components at
capacity
Total 5 59,000 components

Number of
components
at capacity

To summarize, the overhead costs and cost drivers used for each product are
expected to be:

Activity
1. Picking
prints

Cost
Driver
Number of
prints

2. Inventory
Number of
selection and
components
management
3. Website
Number of
optimization
prints at
capacity
4. Framing and Number of
matting
components
at capacity

SteelWoodFramed, Framed,
No
with
Unframed Matting Matting

Total

Overhead
Cost

80,000

15,000

7,000

102,000

$ 30,600

80,000

30,000

21,000

131,000

91,700

100,000

25,800
103,200

100,000
16,000

na

9,000

25,000

32,000

27,000

59,000

123,900
$375,200

Instructions
Answer the following questions.
1. Identify two reasons why an activity-based costing system may be appropriate for Wall
Décor.
2. Compute the activity-based overhead rates for each of the four activities.
3. Compute the product cost for the following three items using ABC. (Review Case 1 for
additional information that you will need to answer this question.)
(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).

Illustration CA 2-5
Summary of overhead costs
and cost drivers

CA-10

Greetings

case 2 Cases for Management Decision-Making

4. In Case 1 for Greetings, the overhead allocations using a traditional volumebased approach were $3.36 for Lance Armstrong, $4.48 for John Elway, and $5.60 for
Lambeau Field. The total product costs from Case 1 were Lance Armstrong $17.36,
John Elway $33.48, and Lambeau Field $48.10. The overhead allocation rate for
unframed prints, such as the unframed Lance Armstrong print in question 3, decreased
under ABC compared to the amount of overhead that was allocated under the traditional approach in Case 1. Why is this the case? What are the potential implications for
the company?
5. Explain why the overhead cost related to website optimization was ?rst divided into two
categories (unframed prints and framed prints) and then allocated based on number of
prints.
6. When allocating the cost of website optimization, the decision was made to initially allocate
the cost across two categories (unframed prints and framed prints) rather than three categories (unframed prints, steel-framed prints, and wood-framed prints with matting). Discuss the pros and cons of splitting the cost between two categories rather than three.
7. Discuss the implications of using operating capacity as the cost driver rather than the
expected units sold when allocating ?xed overhead costs.
8. (a) Allocate the overhead to the three product categories (unframed prints, steelframed prints, and wood-framed prints with matting), assuming that the estimate
of the expected units sold is correct and the actual amount of overhead incurred
equaled the estimated amount of $375,200.
(b) Calculate the total amount of overhead allocated. Explain why the total overhead
of $375,200 was not allocated, even though the estimate of sales was correct. What
are the implications of this for management?