Activity Based Costing †Glaser Health Products Case Essay

IntroductionGlaser Health Products manufactures medical items for the health c ar industry. merchandise involves machining, assembly and painting. Finished units ar then packed and shipped. The pecuniary controller is interested to introduce an action- ground priceing ( alphabet) system to allocate (or distribute) collateral be to products. Indirect constitutes, as distinct from direct be, wad non be unambiguously joined to specific products. The controller would like to calculate product personifys based on alphabet for planning and control, not inventory valuation. Under an ABC system, the allocation of salutes to products is achieved through at least four uninflected steps. Firstly, embody argon grouped into activity aims.Secondly, cost device device drivers argon selected for separately activity level to link activities with cost. Thirdly, for individually activity level, a cost function is defined to arithmetically describe the relationship between cost driver s and costs. Finally, a unit allocated cost is calculated for individually product (Schneider, 2012). This motif outlines a process for introducing an ABC system at Glaser. The paper is divide into six separates. The get-go section groups cost categories identified at Glaser by variance. The second section groups cost categories by division and activity level. The leash section identifies specific cost drivers for each activity level. The fourth section explains earlier spirit level allocation. The fifth section explains uncomplicated stage allocation. The last(a) section summarizes the main conclusions. salute Categories by DivisionGlaser is organized into terzetto functional divisions Operations, sales, and Administration. Operations is the only cost or activity piazza. Glaser recognizes 22 cost categories. These cost categories atomic number 18 grouped by division in Table 1, shown in the appendix.Cost Categories by Division by act LevelThe second step in an ABC system involves separate costs based on the level of activity at which they are generated. An activity involves the movement or handling of any part, component, or absolute product within the relevant organizational unit. The rationale for this grouping is that costs at each activity level are determined by different cost drivers. Four levels of activity are commonly acknowledge unit, dope, product and facility level.Unit-level activities are the nigh granular level of activity. They are performed each time a sub-unit is set upd. Unit-level activities are on-going and reflect basic achievement tasks. Direct labor or direct materials are examples. Costs of these activities generally vary according to the itemize of units produced. Batch-level activities are relevant to batch (rather than continuous) ware processes.They are performed each time a batch of product sub-units is produced. veritable(prenominal) examples of these costs relate to machine setups, order processing, and materials handling. Costs of these activities vary primarily according to the number of batches produced, not the number of units in each the batch. Product-level activities nominate production of each product. The costs of these activities vary primarily according to the number of separate product models. Examples include maintaining bills of materials, processing engineering changes, and product examination routines. Facility-level activities are common to a variety of different products and are the most difficult to link to individual product-specific activities. These activities sustain the production process at an overall production plant or facility. Examples include plant supervision, term of a contract expense and other building occupancy costs. Some firms, including Glaser, choose not to allocate facility-level costs to product costs.Based on these activity level distinctions, the 22 Glaser cost categories may be grouped by division and activity level as shown in Tabl e 2. By mien of digression, it is worth mentioning that as a broad generalization, unit-level activities tend to generate mainly variable costs while and facility-level activities tend to generate mainly set costs, although there can be exceptions. Activities in the other two activity levels tend to generate a mixture of variable and fixed (Hansen & Mowen, 2006).Cost Drivers by Activity Level by DivisionCost drivers can be identified for each activity or cost social class based on observation, discussions with management, simulations and statistical studies. The key is to determine the behavior of indirect costs with respect to activity or resource usage in each activity center (Leslie, 2009). These efforts have identified the eight cost drivers shown in Table 3. Directlabor assembly costs are, by their nature, directly traceable to individual products. Therefore the relevant cost driver for this cost is the number of Direct Assembly working class Hours. The other 21 cost categor ies are indirect costs. At the unit activity level, electricity assembly costs are belike to vary with Direct Labor Hours, Assembly. Similarly, the ternary machining costs grouped at the unit-activity level are in all likelihood to vary with by the number of Direct Labor Hours, Machining. Secondly, at the batch activity level, paint cost is credibly to vary mainly with the quash of Batches Processed. Painting activity is the only batch activity at Glaser.Thirdly, at the product activity level, the two Operations costs are likely to vary mainly with the count of Units Produced and the three Sales costs are also likely to vary mainly with the subject 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 Em ployees. 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 utilise 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. prior Stage AllocationDirect costs can be cogitate immediately to a product without the need for a cost driver. This is not true for indirect costs. An indirect cost requires a cost driver to link that cost with an activity and finally a product (Kimmel, et. al., 2010, Chapter 5). The first step in allocating indirect costs to products is to complete a preliminary stage allocation. This involves allocating the support center costs to the activity centers. In the strip of Glaser, there is only one activity center, Operations. The Glaser controller has decided that the ABC syst em implemented at Glaser should allocate all indirect cost categories to products except for the three Sales and three Administration categories classified as facility-level costs. The only non-activity center costs that need to be assigned are the three product-level Sales division costs. This allocation may best be demonstratedwith an example as summarized by Table 4 provided 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 burden 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 AllocationIn the primary stage allocation, activity center (that is, Operations division) costs are assigned to each of the two products. In the example summarized by Table 5, the 13 costs assigned to Operations totaled $2,041,000. Allocation of these costs based on the various cost drivers results in unit costs of $40.60 for Product A and $27.43 for Product B. Once the $5 non-activity center unit cost is added to each product, the total allocated unit cost is $45.60 and $32.43 for Product A and B respectively.Conclusions write up provides information about the financial health of a firm. That information is used by a variety of stakeholders and other interested parties including managers, investors, enthronement analysts, employees, suppliers, customers, financial journalists, and regulators. At the broadest level, the information is used to improve resource allocation. ABC is a good example of accounting data being used to deck out resource efficiency. ABC allows management to methodically identify activitie s and resources used to produce a product. The system distributes indirect costs to individual products and in that counselling improves product costing and pricing which ultimately affects buying decisions by consumers and investment decisions by management and investors (Edmonds & McNair, 2012).Finally, the Glaser controller decided that the ABC system at Glaser will not allocate all indirect cost categories to products. The three Sales and three Administration division cost categories classified as facility-level costs are excluded from the allocation process. To that extent, costs are not full distribute or allocated to products. The excluded sales andAdministration costs must be recognized at some stage during the product price telescope process otherwise those costs will not be recover by the resultant product prices.ReferencesEdmonds, T. Olds, P. & McNair, F. (2012). Fundamental financial accounting concepts. provoke Edition.Hansen, D. R. & Mowen, M. M. (2006). Cost manag ement accounting and control. Ohio Thomas South-Western.Kimmel, P.D., Weygandt, J.J. & Kelso, D.E. (2010). Financial accounting Tools for blood line 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 end making for the service and manufacturing sectors. San Diego, CA Bridgepoint Education.