'Activity Based Costing – Glaser Health Products Case Essay\r'

'Introduction\r\nGlaser Health point of intersections manufactures medical items for the wellness c atomic number 18 industry. mathematical production involves machining, assembly and caying. faultless building blocks argon then packed and shipped. The monetary control condition is interested to introduce an exercise-establish be ( root principle) governance to divvy up (or distribute) in rate be to merchandises. Indirect personifys, as distinct from direct woos, can non be unambiguously weded to particular products. The controller would like to calculate product damage based on first rudiment for planning and control, non inventory valuation. down the stairs an ABC strategy, the everyocation of appeal to products is achieved through and through at least four analytic steps. Firstly, appeal argon separate into practise directs.\r\nSecondly, personify drivers ar selected for individually(prenominal) practise level to link activities with cost. Third ly, for to distributively one bodily fulfil level, a cost function is delimit to arithmetically describe the relationship among cost drivers and be. Finally, a building block allocated cost is calculated for each(prenominal) product (Schneider, 2012). This publisher outlines a process for introducing an ABC system at Glaser. The paper is divided into sestet dents. The first piece groups cost categories place at Glaser by socio-economic class. The second fraction groups cost categories by division and act level. The third subsection identifies specific cost drivers for each exercise level. The fourth section explains preliminary stand for allocation. The fifth section explains aboriginal full stop allocation. The final section summarizes the main conclusions.\r\n speak to Categories by fragment\r\nGlaser is organized into triplet functional divisions †operations, gross sales, and Administration. trading operations is the provided cost or practise shopping mall. Glaser recognizes 22 cost categories. These cost categories ar grouped by division in Table 1, shown in the appendix.\r\n salute Categories by Division by operation direct\r\nThe second step in an ABC system involves grouping cost based on the level of application at which they be conveyd. An activity involves the movement or handling of any part, component, or sinless product within the relevant organisational unit. The rationale for this grouping is that costs at each activity level argon determined by different cost drivers. Four levels of activity atomic number 18 unremarkably recognized †unit, mickle, product and facility level. Unit-level activities atomic number 18 the most granular level of activity. They be performed each cadence a sub-unit is produced. Unit-level activities be on-going and reflect basic ware tasks. subscribe labor or direct materials are ex vitamin Ales. Costs of these activities generally transfer fit to the number of units produced. Batch-level activities are relevant to batch (rather than continuous) payoff processes.\r\nThey are performed each time a batch of product sub-units is produced. typic examples of these costs relate to machine setups, stray processing, and materials han¬dling. Costs of these activities quit in general fit in to the number of batches produced, non the number of units in each the batch. point of intersection-level activities support production of each product. The costs of these activities vary primarily tally to the number of separate product models. Examples implicate maintaining bills of materials, processing engineering changes, and product examen routines. Facility-level activities are common to a physical body of different products and are the most elusive to link to individual product-specific activities. These activities sustain the production process at an overall production make up or facil¬ity. Examples include plant supervision, renta l expense and another(prenominal) mental synthesis occupancy costs. Some firms, including Glaser, choose not to allocate facility-level costs to product costs.\r\n ground on these activity level distinctions, the 22 Glaser cost categories whitethorn be grouped by division and activity level as shown in Table 2. By way of digression, it is worth mentioning that as a broad generalization, unit-level activities pitch to generate in general variable costs while and facility-level activities tend to generate mainly set(p) costs, although thither can be exceptions. Activities in the other two activity levels tend to generate a mixture of variable and fixed (Hansen & Mowen, 2006).\r\nCost Drivers by Activity Level by Division\r\nCost drivers can be identified for each activity or cost course of study based on observation, discussions with management, simulations and statistical studies. The let out is to determine the behavior of indirect costs with respect to activity or imag inativeness usage in each activity center (Leslie, 2009). These efforts have identified the 8 cost drivers shown in Table 3. purport labor assembly costs are, by their nature, directly traceable to individual products. and then the relevant cost driver for this cost is the number of Direct Assembly attention Hours. The other 21 cost categories are indirect costs. At the unit activity level, electricity assembly costs are in all likelihood to vary with Direct struggle Hours, Assembly. Similarly, the three machining costs grouped at the unit-activity level are likely to vary with by the number of Direct grind Hours, Machining. Secondly, at the batch activity level, paint cost is likely to vary mainly with the identification number of Batches Processed. Painting activity is the precisely(prenominal) batch activity at Glaser.\r\nThirdly, at the product activity level, the two trading operations costs are likely to vary mainly with the add up of Units Produced and the three g ross revenue costs are also likely to vary mainly with the publication 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 gross 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 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.\r\n precedent Stage Allocation\r\nDirect costs can be linked outright 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 case of Glaser, there is only one activity center, Operations. The Glaser controller has dogged that the ABC system 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 appoint are the three product-level Sales division costs. This allocation may scoop be demonstrated with an example as summarized by Table 4 provided in the appendix.\r\nThe 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 tot al $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.\r\n first Stage Allocation\r\nIn 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.\r\nConclusions\r\nAccounting provides development about the financial health of a firm. That information is used by a variety of stakeholders and other interested parties including managers, investors, enthronisation analysts, employees, suppliers, customers, financial journalists, and regulators. At the broadest level, the information is used to improve option allocation. ABC is a good example of accounting info being used to raise resource efficiency. ABC allows management to methodically send activities and resources used to produce a product. The system distributes indirect costs to individual products and in that way improves product costing and determine which ultimately affects buying decisions by consumers and investment decisions by management and investors (Edmonds & McNair, 2012).\r\nFinally, 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 fully distribute or allocated to products. The excluded sales and\r\nAdministration costs must be recognized at some stage during the product price setting process otherwise those costs will not be recovered by the solvent product prices.\r\nReferences\r\nEdmonds, T.; Olds, P. & McNair, F. (2012). Fundamental financial accounting concepts. Kindle Edition.\r\nHansen, D. R. & Mowen, M. M. (2006). Cost management accounting and control. Ohio: Thomas South-Western.\r\nKimmel, P.D., Weygandt, J.J. & Kelso, D.E. (2010). Financial accounting: Tools for business decision-making (5th ed.). keister Wiley Sons: Hoboken, NJ.\r\nLeslie, C. (ed.)(2009). Management accounting: information for creating and managing value. McGraw-Hill Australia.\r\nSchneider, A. (2012). managerial accounting: Decision making for the wait on and manufacturing sectors. San Diego, CA: Bridgepoint Education.\r\n'