Glaser Health Products Essay Example

supplies for the machining department, depreciation on factory equipment, heat, light, and power for the factory, cost of repairing parts improperly manufactured in the machining department, supplies for production scheduling, and depreciation on factory building. On the other hand, product-level activities are performed to support a specific product line and are only incurred when a new product is introduced (Jackson, Sawyers & Jenkins, 2008). For Glaser Health products, product level costs consist of the assembly foreman's salary, cost of hiring new employees, and paint for the assembly department.

Batch-level activities are activities that are performed for each batch or production run of goods. These activities include the advertising manager's salary, salespersons' salaries, salespersons' travel expenses, sales commissions, payroll fringe benefits for workers in the shipping department, and packing supplies. Facility-level activities are activities that are performed to sustain the overall manufacturing processes. These costs are fixed costs and do not vary with the number or type of products produced. Facility-level costs include depreciation on the factory building, the assembly foreman's salary, and electricity for the assembly department.

Cost Driver for Tracing Costs Associated with Different Activity Levels

Cost drivers are factors that cause or drive the incurrence of costs.

The assignment of unit, batch and product level activities to products involves the use of cost drivers to capture the underlying behavior of the costs being assigned. Facility-level costs are allocated based on arbitrary cost drivers such as square footage, number of employees, labor hours, and machine hours (Jackson, Sawyers & Jenkins, 2008). According to Jawahar (2009), unit level activities are driven by direct labor hours, machine hours, and power usage per unit produced. Batch level activities are driven by

the number of machine setups, inspections, and schedules. Product level activities are driven by the number of change orders, tests, products, and new or revised products (Jawahar, 2009).

At facility level activities, the cost drivers include the number of employees managed within the factory and square footage. The Table1 below shows the various cost drivers associated with different activity levels for Glaser Health Products.

How Individual Items of Costs will be traced to Activity Groupings.

Activity based costing will be used to allocate overhead costs. Plant wide allocation uses one pool for the whole plant and department allocation uses one cost pool for each department (Heisinger, 2009). Activities related to sales and administrative costs are required by the controller to produce products. Heisinger (2009) noted that the cost of activities should be allocated to products based on the products use of the activities.

The process of tracing individual costs to activity groupings consists of three crucial steps. Firstly, it is necessary to identify the costly activities involved in product production. The main goal is to gain a comprehensive understanding of all activities related to the company's products, from the perspective of sales and administrative costs. However, focus should be placed only on activities that have the greatest impact on overhead costs (Heisinger, 2009). For Glaser Health Products, the following unit level activities should be identified as having the highest impact on sales costs: advertising manager's salary, salespersons' salaries, salespersons' travel expenses, advertising supplies used, supplies for the sales office, sales commissions,and packing supplies. Additionally,it is important to consider repairing parts that were improperly manufactured in the machining department as a product level activity associated with sales costs.

On the other

hand, administrative costs encompass expenses such as the cost of recruiting and hiring new employees, providing payroll fringe benefits for workers in the shipping department, and leasing computer equipment for the accounting department. These costs should be categorized as batch level activities that are associated with administrative costs (Heisinger, 2009). The next step involves allocating sales and administrative costs to the activities identified in the previous step. It is necessary to assign a portion of the total administrative and sales costs to each activity that was identified in step one. Heisinger (2009) suggests that a cost pool should be created for each activity.

In this stage, the crucial and expensive tasks necessary for product creation have been determined and the sales and administrative expenses have been allocated to each task (Heisinger, 2009). The subsequent phase is to discover a basis for allocating costs to each task. The table below illustrates the relationship between the preceding steps. The third step entails identifying the specific factor that influences the cost of each task.

According to Heisinger (2009), the objective of this step is to determine the most suitable cost driver for each activity identified in the initial phase. After closely examining the process involved in each activity, Glaser identified the following cost drivers. In the context of activity based costing, resources used are connected to activities through resource drivers, and activities are linked to costs through cost drivers (Heisinger, 2009).

How Costs Should be Associated with Products

The primary stage cost drivers view the production process as a series of activities necessary for creating a product.

According to Drury (2004), all expenses related to an activity are combined and distributed among the

products that utilize the activity during production. When a product consumes an activity more than others, it is assigned a higher portion of the costs for that activity, using primary stage cost drivers. This ensures a fairer allocation of costs among the different products. The cost drivers are measurable in a way that allows them to be linked to individual products. Therefore, if set-up hours are chosen as a cost driver, there needs to be a means of measuring the set-up hours used by each product, specifically for Glaser.

Drury (2004) stated that when the number of set-ups is chosen as the cost driver measurement, there is no need for product-specific cost measurements. This is because all products that require a set-up will be charged with a constant set-up cost.

The Importance of Using Preliminary and Primary Stage Cost Drivers

The use of preliminary and primary stage cost drivers not only provides more accurate information, but also leads to better decision making. This is especially beneficial for areas like product pricing, product line changes (such as adding or eliminating products), and product mix decisions (Heisinger, 2009). Additionally, preliminary and primary stage cost drivers enhance understanding of production activities, allow for process improvements, and contribute to cost reduction efforts. According to Heisinger (2009), primary stage cost drivers offer a detailed view of activities such as material procurement, machine setups, and associated costs. This encourages managers to focus on improving the efficiency of the most costly activities, which ultimately reduces overall costs. In conclusion, activity-based costing incorporates multiple cost drivers that closely relate costs to consumed resources and occurring activities.

This particular costing method is

suitable for Glaser Health Products as it enhances the product costing procedure and acknowledges that certain fixed overhead expenses fluctuate in relation to factors other than production units. By establishing a connection between these cost influencers and fixed overhead expenses, Glaser can track each individual product. This will enable the company to allocate costs to different areas of managerial responsibility, processes, customers, departments, in addition to product costs.