GLICKMAN CORPORATION

The GLICKMAN CORPORATION manufactures chairs for several well-known companies. The chairs differ significantly in their complexity and their manufacturing batch sizes. The following costs were incurred in 2017:

Indirect labor costs, such as supervision that supports direct labor, $1,200,000.

Procurement costs of placing purchase orders, receiving materials and paying suppliers related to the number of purchase orders placed, $600,000.

Cost of indirect materials, $350,000.

Cost incurred to set up machines each time a different product needs to be manufactured, $700,000.

Designing processes, drawing process charts, making engineering process changes for products, $900,000.

Machine-related overhead costs, such as depreciation, maintenance, production engineering, $1,200,000. These resources relate to the activity of running the machines.

Plant management, plant rent, and plant insurance, $950,000.

REQUIRED:

Why should managers worry about product overcosting or undercosting?

What is the cost hierarchy? Why do we care about it?

Classify each of the preceding costs as to which category of the cost hierarchy.

Consider two types of chairs made by the GLICKMAN CORPORATION. One is complex to make and is produced in many batches. The other is simple to make and is produced in few batches. Suppose that GLICKMAN needs the same number of machine hours to make each type of chair, and that GLICKMAN allocates overhead costs using machine hours as the only allocation base. How, if at all, would the chairs be costed improperly? Briefly explain why.