To install StudyMoose App tap and then “Add to Home Screen”
Save to my list
Remove from my list
Introduction
Glaser Health Products manufactures medical items for the health care industry involving machining, assembly, painting, packing, and shipping. The financial controller is considering implementing an activity-based costing (ABC) system to allocate indirect costs to products. Unlike direct costs, indirect costs cannot be directly attributed to specific products. The controller aims to use ABC for planning and control purposes rather than inventory valuation. In an ABC system, costs are allocated to products by categorizing them into activity levels.
In addition, cost drivers are chosen for each activity level to connect activities with costs and define a cost function for each activity level to mathematically describe the relationship between cost drivers and costs.
Ultimately, a unit allocated cost is computed for each product (Schneider, 2012). This document presents a method for implementing an ABC system at Glaser, divided into six sections. The first section categorizes costs identified at Glaser by division. The second section groups costs by division and activity level. The third section specifies cost drivers for each activity level.
Verified writer
Proficient in: Activity
5 (204)
“ She followed all my directions. It was really easy to contact her and respond very fast as well. ”
The fourth section clarifies preliminary stage allocation. The fifth section discusses primary stage allocation. The final section provides an overview of the key findings.
Cost Categories by Division
|
Glaser is organized into three functional divisions - Operations, Sales, and Administration. |
Operations is the only cost or activity center. Glaser recognizes 22 cost categories. These cost categories are grouped by division in Table 1, shown in the appendix. |
Cost Categories by Division and Activity Level
The second step in an ABC system involves categorizing costs based on the level of activity in which they occur.
An activity pertains to the movement or handling of any part, component, or finished product within a specific organizational unit. Costs at each activity level have distinct cost drivers. There are four commonly recognized levels of activity – unit, batch, product, and facility level. Unit-level activities are the most detailed and occur each time a sub-unit is produced. These activities are ongoing and involve basic production tasks such as direct labor or direct materials, with costs varying based on the number of units produced. Batch-level activities, on the other hand, are specific to batch production processes rather than continuous production.
Product-level activities support production of each product, such as maintaining bills of materials, processing engineering changes, and product testing routines. They are performed whenever a batch of product sub-units is produced, with costs varying based on the number of separate product models. Facility-level activities sustain the production process at an overall production plant or facility, including plant supervision, rental expense, and other building occupancy costs. Some firms, such as Glaser, opt not to allocate facility-level costs to product costs.
According to the activity level categories, the 22 Glaser cost categories can be classified by division and activity level as indicated in Table 2. It is important to note that in a general sense, unit-level activities typically result in variable costs, while facility-level activities tend to lead to fixed costs, with some exceptions. Activities in the remaining two activity levels often produce a combination of variable and fixed costs (Hansen & Mowen, 2006).
Division Cost Drivers by Activity Level
Cost drivers can be determined for each activity or cost category through various methods such as observation, discussions with management, simulations, and statistical studies. The main objective is to understand how indirect costs behave in relation to activity or resource usage in each activity center (Leslie, 2009). These efforts have identified eight cost drivers as shown in Table 3. Direct labor assembly costs are directly linked to individual products, making the number of Direct Assembly Labor Hours the relevant cost driver for this category. The remaining 21 cost categories consist of indirect costs. Electricity assembly costs at the unit activity level are expected to fluctuate in relation to Direct Labor Hours, Assembly. Similarly, the three machining costs at the unit-activity level are likely to vary based on the number of Direct Labor Hours, Machining. At the batch activity level, paint cost is primarily influenced by the Number of Batches Processed. Glaser's painting activity is the only batch activity at the establishment.
Thirdly, at the product activity level, the two Operations costs are likely to vary mainly with the Number of Units Produced while the three Sales costs are also likely to vary mainly with the Number of Units Produced. Finally, at the facility-level, the five Operations costs are likely to vary mainly with the Number of Units Produced, the Square Feet of Building Space Used, Payroll Costs, the Number of Employees, and the Change in Number of Employees. The three Sales costs are also likely to vary mainly with the Number of Employees. The three Administration costs are likely to vary mainly with the Number of Employees, the Change in Number of Employees and the number of Square Feet of Space Used. In summary, eight separate cost drivers may be used by Glaser to link activities with indirect costs and finally allocate those costs to individual products. These cost drivers are summarized by activity level by division in Table 3.
Preliminary Allocation Stage
Direct costs can be immediately associated with a product without the need for a cost driver, unlike indirect costs. Indirect costs require a cost driver to connect the cost with an activity and ultimately a product (Kimmel, et. al., 2010, Chapter 5). The initial step in assigning indirect costs to products is to conduct a preliminary stage allocation, which involves distributing support center costs to activity centers. In Glaser's case, there is only one activity center, Operations. The Glaser controller has decided that the ABC system used at Glaser should assign all indirect cost categories to products except for the three Sales and three Administration categories, which are considered facility-level costs. The only non-activity center costs that need to be allocated are the three product-level Sales division costs. This allocation can be illustrated best with an example, as shown in Table 4 in the appendix.
The table assumes Glaser produces two products, A and B, with 30,000 units of each product produced during the period. It also assumes that product-level Sales division costs total $300,000. Allocation of these non-activity center costs result in unit costs of $5 for Product A and $5 for Product B. These unit costs are identical at $5 because the number of units produced is equal at 30,000 units for Product A and 30,000 units for Product B. These non-activity center unit costs need to be added to unit costs derived from the primary stage allocation.
Primary Stage Allocation
During the primary stage allocation, the costs of the Operations division are distributed to Product A and Product B. In Table 5, it is shown that the total costs assigned to Operations were $2,041,000. By using different cost drivers, the unit costs were calculated to be $40.60 for Product A and $27.43 for Product B. After adding the $5 non-activity center unit cost to each product, the final allocated unit costs became $45.60 for Product A and $32.43 for Product B.
Overall findings
Accounting is crucial for providing information on a company's financial status, which is utilized by stakeholders such as managers, investors, employees, suppliers, customers, journalists, and regulators. This data helps enhance resource allocation by improving efficiency. ABC is an effective tool in accounting that helps identify activities and resources involved in product production, ultimately impacting product costing and pricing decisions made by consumers and investors (Edmonds & McNair, 2012).
The Glaser controller has made the decision that the ABC system at Glaser will not allocate all indirect cost categories to products. Specifically, the three Sales and three Administration division cost categories classified as facility-level costs are not included in the allocation process. As a result, costs are not fully distributed or allocated to products. It is important that the excluded sales and Administration costs are accounted for during the product price setting process in order to ensure that those costs are recovered through the resultant product prices.
Paraphrase and consolidate the following text:
References
Edmonds, T.; Olds, P. & McNair, F. (2012). Fundamental financial accounting concepts. Kindle Edition.
Hansen, D. R. & Mowen, M. (2006). Cost management accounting and control. Ohio: Thomas South-Western.
Kimmel, P.D., Weygandt, J.J. & Kelso, D.E. (2010). Financial accounting: Tools for business decision-making (5th ed.). John Wiley Sons: Hoboken, NJ.
Leslie, C. (ed.) (2009). Management accounting: information for creating and managing value.McGraw-Hill Australia.
Schneider,A.(2012). Managerial accounting: Decision making for the service and manufacturing sectors.San Diego ,CA : Bridgepoint Education.
Implementing Activity-Based Costing at Glaser: A Methodological Approach. (2016, Mar 30). Retrieved from https://studymoose.com/activity-based-costing-glaser-health-products-case-essay
👋 Hi! I’m your smart assistant Amy!
Don’t know where to start? Type your requirements and I’ll connect you to an academic expert within 3 minutes.
get help with your assignment
