Activity Based Costing – Glaser Health Products Case

Activity Based Costing – Glaser Health Products Case

Introduction

Glaser Health Products manufactures medical items for the health care industry. Production involves machining, assembly and painting. Finished units are then packed and shipped. The financial controller is interested to introduce an activity–based costing (ABC) system to allocate (or distribute) indirect costs to products. Indirect costs, as distinct from direct costs, cannot be unambiguously linked to specific products. The controller would like to calculate product costs based on ABC for planning and control, not inventory valuation.

Under an ABC system, the allocation of costs to products is achieved through at least four analytical steps. Firstly, costs are grouped into activity levels. Secondly, cost drivers are ... Show more content on Helpwriting.net ...Cost Drivers by Activity Level by Division

Cost drivers can be identified for each activity or cost category 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.

Direct labor 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 Labor Hours. The other 21 cost categories are indirect costs.

At the unit activity level, electricity assembly costs are likely to vary with Direct Labor Hours, Assembly. Similarly, the three machining costs grouped at the unit–activity level are likely to vary with by the number of Direct Labor Hours, Machining.

Secondly, at the batch activity level, paint cost is likely to vary mainly with the Number 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 Number of Units Produced and 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

... Get more on HelpWriting.net ...