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 Customer deliveries Manual order processing Electronic order processing Line item picking Total selling and administrative expenses Activity Measure Number of deliveries Number of manual orders Number of electronic orders Number of line items picked Total Cost $ 467,500 360,000 214,500 675,000 $ 1,717,000 Total Activity 5,500 deliveries 4,500 orders 13,000 orders 450,000 line items Med Max gathered the data below for two of the many hospitals that it serves-City General and County General: Activity City County General General 40 20 Activity Measure Number of deliveries Number of manual orders Number of electronic orders Number of line items picked 80 20 150 310

Answer 1

Ans. 1	Activity Cost Pool	Activity Rate
	Customer deliveries	$85.00	per delivery
	Manual order processing	$80.00	per manual order
	Electronic order processing	$16.50	per electronic order
	Line item picking	$1.50	per line item picked
	*Calculation of Activity rate :
	Activity rate = Total cost / Total activity
	Activity cost pools	Total Cost   (a)	Total activity (b)	Activity rate (a/b)
	Customer deliveries	$467,500	5500	$85.00
	Manual order processing	$360,000	4500	$80.00
	Electronic order processing	$214,500	13000	$16.50
	Line item picking	$675,000	450000	$1.50
Ans. 2		ABC Cost
	Activity cost pools	City General	County General
	Customer deliveries	$1,700	$3,400
	Manual order processing	$0	$6,400
	Electronic order processing	$330	$0
	Line item picking	$225	$465
	Total Activity Costs	$2,255	$10,265
	*Calculations for Activity cost assigned:
	Activity cost assigned = Actual activity * Activity rates
			Cost drivers by product		Overhead cost assigned
	Activity cost pools	Activity rate   (a)	City General (b)	County General (c)	City General (a*b)	County General (a*c)
	Customer deliveries	$85.00	20	40	$1,700	$3,400
	Manual order processing	$80.00	0	80	$0	$6,400
	Electronic order processing	$16.50	20	0	$330	$0
	Line item picking	$1.50	150	310	$225	$465
	Total Activity Costs				$2,255	$10,265