Question

Exercise 4-9 Compute and Use Activity Rates to Determine the Costs of Serving Customers [LO4-2, 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 $ 467,500 360,000 214,500 675,000 $1,717,000 Total Activi 5,500 deliv 4,500 order 13,000 order 450,000 line 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 20 40 Activity Measure Number of deliveries Number of manual orders Number of electronic orders Number of line items picked 80 0 20 150 310 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

1.

Activity cost pool	Total cost	Total activity driver	Activity rate for each activity cost pool [ Total cost/ Total activity driver]
Customer deliveries	467,500	5500	85
Manual order processing	360,000	4500	80
Electronic order processing	214,500	13000	16.5
Line item packing	675,000	450,000	1.5

2.

	City General	County General
No of deliveries	1700	3400
	[20*85]	[40*85]
No of manual orders	0	6400
		[80*80]
No of electronic orders	330	0
	[20*16.5]
No of line items packed	225	465
	[150*1.5]	[310*1.5]
Total activity costs	2255	10265