Case 5A - Glaser Health Products
BUS 630 Managerial Accounting
February 25, 2013
Case 5A – Glaser Health Products
Glaser Health Products of Ranier Falls, Georgia needs assistance in evaluating and classifying costs in order to implement an activity-based costing system. As stated in the case, these costs will be used for planning and control decisions rather than inventory valuation. The activity-based costing system will provide better allocation of Glaser’s overhead costs rather than a system to look at the cost drivers or the activities that their overhead costs comprise. Glaser’s general structure of an activity-based costing model should consist of cost objects, activities, consumption of resources, and cost. Activity-based costing changes “the rules of the game” since it changes some of the key measures that manager’s use for their decision making and for evaluating individuals’ performance (Accounting4management.com). In order for Glaser to implement a successful activity-based costing system management must take a look at their overhead costs and justify whether or not they have enough overhead to be worrying about. While we do not know Glaser’s monetary value of their overhead costs, it seems that they have several divisions with a large amount of cost categories management must consider. The three main divisions of Glaser Health Products are Operations, Sales, and Administrative. Under each division are costs categories that have been divided up to help management determine where they belong. (Appendix A identifies each of the costs with the appropriate division). Next, management must identify the big overhead cost in order to determine whether or not they want to allocate some or a bunch of overhead using the activity-based costing system. I suggest that Glaser creates an activity-based costing system that allocates, with a minimal amount of effort, a large portion of their overhead. For instance, management is correct in identifying each of the costs using four different activities. These include unit-level activities, batch-level activities, product-level activities, and facility-level activities. This is a great system because the fewer activities Glaser can use to do this, the easier the accounting will be for management. These four activities will allow Glaser to fairly and accurately allocate overhead to product lines. (Appendix B illustrates each of the costs under one of the four activities and also classifies the four activities under one of the three divisions). After Glaser management has identified the handful of the activities that connect overhead expenses to products, they must use the appropriate measure (the cost driver) to tie the overhead expenses to the product lines or service lines. To achieve this management must specify an appropriate cost driver for tracing costs associated with the various levels of activities to the next cost objective or products. The cost drivers can include a number of things such as direct labor hours, number of batches, or number of employees. (Appendix C shows the appropriate cost driver with the various levels of activities). Under the Activity-based costing system, Glaser will use preliminary stage cost drivers to link costs of resources consumed in one activity center to other activity centers. Some costs, such as batch-level activity center costs are initially assigned to a primary stage activity center and only need a single assignment process, and are traceable to specific products but often use a cost driver. Product-level activity center costs may be related to a specific product or grouped by activities before being assigned to products at the primary stage. Facility-level activity center costs may go through multiple preliminary stages before being assigned to products (Schneider, 2012). It is necessary to use a preliminary stage cost driver because this system assigns costs from activities to other activities. On the other...
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