Question

Med Max buys surgical supplies from a variety of manufacturers and then resells and delivers these supplies to dozens of hospitals. In the face of declining profits, Med Max decided to implement an activity-based costing system to improve its understanding of the costs incurred to serve each hospital. The company broke its selling and administrative expenses into four activities as shown below:
Activity Cost Pool (Activity Measure) Total Cost Total Activity
Customer deliveries (Number of deliveries) $630,000 7,000 deliveries
Manual order processing (Number of manual orders) 444,000 6,000 orders
Electronic order processing (Number of electronic orders) 231,000 11,000 orders
Line item picking (Number of line items picked) 955,500 490,000 line items
Other organization-sustaining costs (None) 610,000
Total selling and administrative expenses $2,870,500

Med Max gathered the data below for two of the many hospitals that it serves—City General and County General:


Activity
Activity Measure General City County General
Number of deliveries 10 20
Number of manual orders 0 40
Number of electronic orders 10 0
Number of line items picked 120 280

Required:
a. Compute the activity rate for each activity cost pool.
b. Compute the total activity costs that would be assigned to City General and County General.

Answer 1

Answer:

A. Customer deliveries $90

Manual order processing $74

Electronic order processing $21

Line item picking $1.95

B. CITY GENERAL

Activity cost pools City General

Customer deliveries $900

Manual order processing $0

Electronic order processing $210

Line item picking $234

Total Activity Costs $1,344

COUNTRY GENERAL

Activity cost pools Country General

Customer deliveries $1,800

Manual order processing $2,960

Electronic order processing $0

Line item picking $546

Total Activity Costs $5,306

Explanation:

a. Computation for the activity rate for each activity cost pool

Using this formula

Activity rate = Total cost / Total activity

Let plug in the formula

Activity cost pools Total Cost (a) Total activity (b) Activity rate (a/b)

Customer deliveries $630,000/ 7,000 =$90

Manual order processing $444,000/ 6,000 =$74

Electronic order processing $231,000/ 11,000 =$21

Line item picking $955,500/ 490,000=$1.95

Therefore the activity rate for each activity cost pool are:

Customer deliveries $90

Manual order processing $74

Electronic order processing $21

Line item picking $1.95

b. Computation for the total activity costs that would be assigned to City General and County General

Using this formula

Activity cost assigned = Actual activity * Activity rates

Cost drivers by product Overhead cost assigned

CITY GENERAL

Activity cost pools Activity rate (a) City General(b) City General (a*b)

Customer deliveries $90 *10 =$900

Manual order processing $74*0=$0

Electronic order processing $21* 10=$210

Line item picking $1.95*120=$234

Total Activity Costs $1,344

($900+$0+$210+$234)

COUNTRY GENERAL

Activity cost pools Activity rate (a) Country General(b) Country General (a*b)

Customer deliveries $90 *20 =$1,800

Manual order processing $74*40=$2,960

Electronic order processing $21* 0=$0

Line item picking $1.95*280=$546

Total Activity Costs $5,306

($1,800+$2,960+$0+546)

Therefore The the total activity costs that would be assigned to City General and County General

are:

CITY GENERAL

Activity cost pools City General

Customer deliveries $900

Manual order processing $0

Electronic order processing $210

Line item picking $234

Total Activity Costs $1,344

COUNTRY GENERAL

Activity cost pools Country General

Customer deliveries $1,800

Manual order processing $2,960

Electronic order processing $0

Line item picking $546

Total Activity Costs $5,306