CASE 5A — GLASER HEALTH PRODUCTS
Glaser Health Products of Ranier Falls, Georgia, is organized functionally into three divisions: Operations, Sales, and Administrative. Purchasing, receiving, materials and production control, manufacturing, factory personnel, inventory stores, and shipping activities are under the control of the vice-president for operations, George Gottlieb. Advertising, market research, and sales are the responsibility of the vice president for sales, Jake Bogan. Accounting, budgeting, the firm’s computer center, and general office management are delegated to the corporate controller (Administrative), Charlie Kaplan. The following cost categories are found in the company as a whole:
| (a) (b) (c) (d) (e) (f) (g) (h) (i) (j) (k) (l) (m) (n) (o) (p) (q) (r) (s) (t) (u) (v) |
Depreciation on factory equipment. Depreciation on office equipment. Depreciation on factory building. Advertising manager’s salary. Assembly foreman’s salary. Salespersons’ salaries. Salespersons’ travel expenses. Supplies for the Machining Department. Advertising supplies used. Electricity for the Assembly Department. Lost materials (scrap) in a Machining Department. Direct labor in the Assembly Department. Supplies for the sales office. Sales commissions. Packing supplies. Cost of hiring new employees. Payroll fringe benefits for workers in the Shipping Department. Supplies for Production Scheduling. Cost of repairing parts improperly manufactured in the Machining Department. Paint for the Assembly Department. Heat, light, and power for the factory. Leasing of computer equipment for the Accounting Department. |
Required:
1-Identify each of the costs with the appropriate division: Operations, Sales, Administrative.
2–Identify each of the costs with one of the following:
| (a) Unit-level activities. (b) Batch-level activities. |
(c) Product-level activities. (d) Facility-level activities. |
Organize these classifications by division: Operations, Sales, Administrative.
3–Specify an appropriate cost driver for tracing costs associated with the various levels of activities to the next cost objective or products, whichever is appropriate.
4–Glaser Health Products is interested in using activity-based costing to identify as many costs as possible with the products. These costs will be used for planning and control decisions rather than for inventory valuation. The controller decided that all operation costs will be related to products but only those sales and administrative costs that are classified as unit-level, batch-level, or product-level costs should be related to products. Using preliminary stage cost drivers, explain how individual items of
costs will be traced to activity groupings.
5–Using primary stage cost drivers, show how the costs should be related to products.
6–Explain why it is necessary to use preliminary stage and primary stage cost drivers.
Answer 1.
| Cost | Division |
| Depreciation on factory equipment. | Operations |
| Depreciation on office equipment. | Administrative |
| Depreciation on the factory building. | Operations |
| Advertising manager’s salary. | Sales |
| Assembly foreman’s salary. | Operations |
| Salespersons’ salaries. | Sales |
| Salespersons’ travel expenses. | Sales |
| Supplies for the Machining Department. | Operations |
| Advertising supplies used. | Sales |
| Electricity for the Assembly Department. | Operations |
| Lost materials (scrap) in a Machining Department. | Operations |
| Direct labor in the Assembly Department. | Operations |
| Supplies for the sales office. | Sales |
| Sales commissions. | Sales |
| Packing supplies. | Operations |
| Cost of hiring new employees. | Operations |
| Payroll fringe benefits for workers in the Shipping Department. | Operations |
| Supplies for Production Scheduling. | Operations |
| Cost of repairing parts improperly manufactured in the Machining Department. | Operations |
| Paint for the Assembly Department. | Operations |
| Heat, light, and power for the factory. | Operations |
| Leasing of computer equipment for the Accounting Department. | Administrative |
Answer 2.
| Cost | Activity |
| Depreciation on factory equipment. | Facility-level activities |
| Depreciation on office equipment. | Batch-level activities |
| Depreciation on the factory building. | Facility-level activities |
| Advertising manager’s salary. | Facility-level activities |
| Assembly foreman’s salary. | Unit-Level activities |
| Salespersons’ salaries. | Facility-level activities |
| Salespersons’ travel expenses. | Facility-level activities |
| Supplies for the Machining Department. | Batch-level activities |
| Advertising supplies used. | Facility-level activities |
| Electricity for the Assembly Department. | Unit-Level activities |
| Lost materials (scrap) in a Machining Department. | Unit-Level activities |
| Direct labor in the Assembly Department. | Unit-Level activities |
| Supplies for the sales office. | Facility-level activities |
| Sales commissions. | Facility-level activities |
| Packing supplies. | Facility-level activities |
| Cost of hiring new employees. | Batch-level activities |
| Payroll fringe benefits for workers in the Shipping Department. | Unit-Level activities |
| Supplies for Production Scheduling. | Batch-level activities |
| Cost of repairing parts improperly manufactured in the Machining Department. | Unit-Level activities |
| Paint for the Assembly Department. | Unit-Level activities |
| Heat, light, and power for the factory. | Facility-level activities |
| Leasing of computer equipment for the Accounting Department. | Facility-level activities |
Answer 3.
| Cost | Cost Driver |
| Depreciation on factory equipment. | Number of units |
| Depreciation on office equipment. | Number of units |
| Depreciation on the factory building. | Cost of the Building |
| Advertising manager’s salary. | Num of employees managed |
| Assembly foreman’s salary. | DLH |
| Salespersons’ salaries. | Num of units sold |
| Salespersons’ travel expenses. | Sales Ratio |
| Supplies for the Machining Department. | Num of supplies in Department |
| Advertising supplies used. | Num of units sold |
| Electricity for the Assembly Department. | Num of points in depart |
| Lost materials (scrap) in a Machining Department. | Num of material moves |
| Direct labor in the Assembly Department. | DLH/DLC |
| Supplies for the sales office. | Num of units for each |
| Sales commissions. | Num of units sold |
| Packing supplies. | Num of units sold |
| Cost of hiring new employees. | DLH/DLC |
| Payroll fringe benefits for workers in the Shipping Department. | DLH/DLC |
| Supplies for Production Scheduling. | No of units for each |
| Cost of repairing parts improperly manufactured in the Machining Department. | DLH/Machine hours |
| Paint for the Assembly Department. | DLH/DLC |
| Heat, light, and power for the factory. | Num of units consumed |
| Leasing of computer equipment for the Accounting Department. | Equipment cost price |
Answer 4.
Some of the costs can be traced directly to the objects, while some cannot. One example is direct labor and direct material cost which can be traced directly to the product. Some other examples are here such as the development of the product catalog, for example, can take hours of indirect labor and many other internal resources which are all attributed to various cost pools. Causality is needed to be pinned to have an accurate cost driver (Coking & Capusneanu, 2010).
Answer 5.
The perfect cost driver is the one which is related to the cost to which it is allocated. However, identification of the allocation base which is related to the cost is mostly difficult. By using the ABC system, the choice of the cost driver or the allocation base is easier as the company can use the activity volume as a measure. However, accuracy is traded off against the complication of the Activity Based Costing system. Like, for the machine set-up costs the most reasonable allocation base would be to use the set-up hours (Homburg, 2001).
Answer 6.
Primary stage cost driver refers to the initial cause of the need for resources by an activity creating the demand for that specific activity. The key stage cost driver and the beginning stage is the underlying cause of the costs. The driver of the activity would also drive the costs of the activity. The key driver reflects the prime and prime reason of the activity, and the secondary driver shows the one which is caused by a past event or activity. For example, the purchasing costs, consumer demand or the characteristics of the product design would be the primary drivers and the number of suppliers chosen for it. It is significant to choose the most appropriate cost driver. Hence, this shows it is important to use primary stage cost drivers (Toompuu & Polajeva, 2014).
References
Coking, G., & Capusneanu, S. (2010). Cost Drivers. Evolution and Benefits. Theoretical and Applied Economics, 17(8), 7-16.
Homburg, C. (2001). A note on optimal cost driver selection in ABC. Management Accounting Research, 12(2), 197-205.
Toompuu, K., & Polajeva, T. (2014). Theoretical Framework and an Overview of the Cost Drivers that are Applied in Universities for Allocating Indirect Costs. Procedia – Social and Behavioral Sciences, 110(1), 1014-1022.
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