Question

Exercise 4-9 Compute and Use Activity Rates to Determine the Costs of Serving Customers (L04-2, LO4-3] 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 $ 361,900 266,400 191,540 518,000 $ 1,337,840 Total Activity 4,700 deliveries 3,700 orders 12,200 orders 370,000 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 15 60 20 130 Activity Measure Number of deliveries Number of manual orders Number of electronic orders Number of line items picked 30 290 Required: 1. Compute the activity rate for each activity cost pool. 2. Compute the total activity costs that would be assigned to City General and County General.

Answer 1

Ans. 1	Activity Cost Pool	Activity Rate
	Customer deliveries	$77.00	per delivery
	Manual order processing	$72.00	per manual order
	Electronic order processing	$15.70	per electronic order
	Line item picking	$1.40	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	$361,900	4700	$77.00
	Manual order processing	$266,400	3700	$72.00
	Electronic order processing	$191,540	12200	$15.70
	Line item picking	$518,000	370000	$1.40
Ans. 2		ABC Cost
	Activity cost pools	City General	County General
	Customer deliveries	$1,155	$2,310
	Manual order processing	$0	$4,320
	Electronic order processing	$314	$0
	Line item picking	$182	$406
	Total Activity Costs	$1,651	$7,036
	*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	$77.00	15	30	$1,155	$2,310
	Manual order processing	$72.00	0	60	$0	$4,320
	Electronic order processing	$15.70	20	0	$314	$0
	Line item picking	$1.40	130	290	$182	$406
	Total Activity Costs				$1,651	$7,036