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 selected for each activity level to link activities with costs. Thirdly, for each activity level, a cost function is defined to arithmetically describe the relationship between cost drivers and costs. Finally, a unit allocated cost is calculated for each product (Schneider, 2012).
This paper outlines a process for introducing an ABC system at Glaser. The paper is divided into six sections. The first section groups cost categories identified at Glaser by division. The second section groups cost categories by division and activity level. The third section identifies specific cost drivers for each activity level. The fourth section explains preliminary stage allocation. The fifth section explains primary stage allocation. The final section summarizes the main conclusions.
Cost Categories by Division
Glaser is organized into three functional divisions - Operations, Sales, and Administration. Operations is the only cost or activity center. Glaser recognizes 22 cost categories. These cost categories are grouped by division in Table 1, shown in the appendix.
Cost Categories by Division by Activity Level
The second step in an ABC system involves grouping costs based on the level of activity at which they are generated. An activity involves
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 selected for each activity level to link activities with costs. Thirdly, for each activity level, a cost function is defined to arithmetically describe the relationship between cost drivers and costs. Finally, a unit allocated cost is calculated for each product (Schneider, 2012).
This paper outlines a process for introducing an ABC system at Glaser. The paper is divided into six sections. The first section groups cost categories identified at Glaser by division. The second section groups cost categories by division and activity level. The third section identifies specific cost drivers for each activity level. The fourth section explains preliminary stage allocation. The fifth section explains primary stage allocation. The final section summarizes the main conclusions.
Cost Categories by Division
Glaser is organized into three functional divisions - Operations, Sales, and Administration. Operations is the only cost or activity center. Glaser recognizes 22 cost categories. These cost categories are grouped by division in Table 1, shown in the appendix.
Cost Categories by Division by Activity Level
The second step in an ABC system involves grouping costs based on the level of activity at which they are generated. An activity involves
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