Question

Pharmax Distributors specializes in the distribution of pharmaceutical products at the retail level. Pharmax's customer base is comprised of three main retail groups: general supermarket chains, large drugstore chains, and small, single-store "Ma & Pa" pharmacies. To evaluate the relative profitability of each customer group, Pharmax plans to use an allocation system that recognizes the relative demands that these groups place on the company's resources. Parmax's chief accountant examined the firm's support costs and activities and collected the following data for a typical operating period: Support Activity Budgeted Cost Total Cost Driver Order processing $75,000 1,910 customer orders Line item processing $65,000 19,620 line items Store deliveries $68,000 1,470 deliveries Carton handling $76,000 67,050 cartons shipped She also gathered the following data for a typical operating period: General Supermarket Drugstore Chains Ma & Pa Customer orders 130 380 1,400 Line items 1,820 3,800 14,000 Deliveries 100 270 1,100 Cartons shipped 27,000 20,250 19,800 REQUIRED [ROUND ALL ALLOCATION RATES TO THE NEAREST CENT AND ALLOCATIONS TO THE NEAREST DOLLAR.] Part A (5 tries; 5 points) If Pharmax uses a single-driver system to allocate its support costs, with number of customer orders as the single driver, how much would be allocated to its Ma & Pa customers? Tries 0/5 Part B (5 tries; 5 points) If Pharmax uses an activity-based costing system to allocate its overhead costs, how much would be allocated to its Drugstore Chain customers?

Answer 1

a)

Activity	Total cost
Order processing	75000
Line item processing	65000
Store deliveries	68000
Carton handling	76000
Total cost	284000
Total activity (Customer order)	1910
Activity rate [284000/1910]	$ 148.69 per customer order
Cost allocated to MA & PA customers (actual activity used *activity rate)	1400 *148.69 = $ 208166

b)

				COST ALLOCATED TO DRUGSTORE CHAIN CUSTOMERS
Activity	Total cost [A]	Estimated activity [B]	Activity rate [A/B]	ACTUAL activity	cost allocated (Actual activity *activity rate)
Order processing	75000	1910	75000/1910=$ 39.27 Per customer order	380	14922.6
Line item processing	65000	19620	65000/19620 = $ 3.31 per line item processed	3800	12578
Store deliveries	68000	1470	68000/1470 =$ 46.26 per deliveries	270	12490.2
Carton handling	76000	67050	76000/67050 =$ 1.13 per carton shipped	20250	22882.5
TOTAL COST ALLOCATED TO DRUGSTORE CHAIN CUSTOMERS					62873