Case 5a Glaser Health Products Of Rani ✓ Solved

Case 5a Glaser Health Productsglaser Health Products Of Ranier Fall

Glaser Health Products of Ranier Falls, Georgia, is organized into three divisions: Operations, Sales, and Administrative, each overseeing specific activities such as manufacturing, marketing, and office functions. This case involves classifying various costs into appropriate divisions and activity levels, identifying suitable cost drivers, and applying activity-based costing (ABC) for planning and control decisions. It also includes understanding preliminary and primary stage cost drivers to allocate costs accurately and justify their use for managerial decision-making.

Sample Paper For Above instruction

Glaser Health Products, a company based in Ranier Falls, Georgia, operates through three distinct divisions: Operations, Sales, and Administrative. Each division is responsible for specific segments of the company’s operations, which include manufacturing activities, marketing, and administrative functions such as accounting and office management. The core challenge in managerial accounting within this organization is to accurately assign costs to products, processes, and activities to enhance planning, control, and decision-making. Activation of activity-based costing provides a nuanced understanding of how costs are incurred at various levels, which ultimately supports strategic management.

Cost Classification by Division

Proper classification of costs by division involves understanding the nature of each expense and linking it to the respective activity center. Factory-related costs, such as depreciation on factory equipment and buildings, assembly foreman's salary, and factory utilities, directly pertain to the Operations division. Marketing-related expenses, including advertising salaries, market research, salespersons’ salaries, and travel expenses, belong to the Sales division. Administrative costs, including accounting, budgeting, computer center expenses, and general office management salaries, are assigned to the Administrative division. For example, depreciation on the factory equipment, factory building, and factory electricity are operational expenses tied to manufacturing. Conversely, advertising expenses, sales personnel compensation, and travel are inherently Sales division costs. Administrative expenses encompass office salaries, computer leasing, and management personnel salaries.

Cost Classification by Activity Level

Classifying costs based on activity levels involves understanding the specific activities that consume resources within each division. In the Operations division, costs such as direct labor, supplies for production, and repairs of defective parts are typically unit-level activities, directly associated with manufacturing individual units. Batch-level activities include setups, maintenance, or quality inspections performed in groups. Factory utilities such as electricity and heating relate to facility-level activities, which support overall manufacturing operations. In the Sales division, costs like salespersons’ salaries and travel expenses are batch-level activities, supporting sales campaigns and customer outreach. Advertising expenses, such as advertising supplies and manager’s salary, are product-level activities, focusing on promoting specific products. Administrative costs, including rent and salaries for administrative personnel, are considered facility-level activities because they support overall operations without being tied to specific products or batches.

Cost Drivers for Activity Level Costs

Choosing appropriate cost drivers is critical for tracing costs accurately from activities to cost objects such as products or services. For unit-level activities, a suitable cost driver might be direct labor hours or machine-hours since these directly link resource consumption to the number of units produced. Batch-level activities can be driven by the number of setups, batches processed, or order counts. Facility-level activities are best driven by measures such as square footage, total factory hours, or utility consumption metrics like kilowatt-hours, which reflect overall resource use. For example, electricity consumption in the factory can be driven by machine-hours, and advertising expenses can be driven by the number of advertising campaigns or commercials aired. Using these drivers provides a basis for assigning costs with greater precision, facilitating more accurate product costing.

Activity-Based Costing (ABC): Preliminary Stage Cost Drivers

In the preliminary stage, cost drivers help assign costs to activity groups based on cost pools. For instance, in ABC, manufacturing overheads such as machinery repairs or factory utilities are allocated to activity pools like machine setups or energy consumption. These pools are then assigned to products based on preliminary cost drivers such as number of machine setups or total machine-hours. For sales and administrative activities, drivers like number of sales calls or administrative hours help distribute costs among products or departments. ABC thus enables a detailed tracing of costs by linking them directly to the activities that generate them. This approach improves decision-making, especially when assessing the true profitability of products, identifying waste, or planning capacity enhancements.

Using Primary Stage Cost Drivers

The primary stage cost drivers are used to relate activity costs to products and services more directly. For example, in manufacturing, machine-hours are a primary driver for assigning machinery-related costs to products. For sales activities, the number of sales orders or customer interactions can serve as primary drivers. These drivers provide a logical and quantifiable means of assigning costs, which supports more accurate product costing and profitability analysis. They also facilitate performance evaluation, budget planning, and cost control, ensuring that management can identify the most significant cost influences and take corrective actions. The use of primary drivers improves the accuracy of cost allocation by directly linking resources consumed to the activities that generate costs, thereby aiding strategic and operational decisions.

Importance of Preliminary and Primary Stage Cost Drivers

The use of both preliminary and primary stage cost drivers is essential in activity-based costing because it ensures a systematic and hierarchical approach to cost allocation. Preliminary drivers help allocate costs from indirect cost pools to activity groups, while primary drivers facilitate the assignment of these costs from activities to specific products or services. Employing these drivers enhances the accuracy and relevance of cost information, enabling management to distinguish between fixed and variable costs, identify cost-saving opportunities, and improve product pricing strategies. Additionally, these drivers assist in identifying non-value-added activities, optimizing resource utilization, and supporting process improvements. Without careful selection and application of these drivers, cost data may be misleading, leading to suboptimal decision-making and resource allocation.

Conclusion

In summary, Glaser Health Products' classification of costs by division and activity level provides a foundation for implementing effective activity-based costing. Accurate cost tracing using suitable cost drivers enables comprehensive insight into product profitability, cost control, and operational efficiency. Employing both preliminary and primary stage cost drivers ensures a structured approach to cost allocation that supports informed decision-making, strategic planning, and competitive advantage. Ultimately, ABC serves as a strategic tool for managing costs and enhancing organizational performance in a complex manufacturing and sales environment.

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