Question

This is a cost allocation problem for a merchandising firm. Since merchandising firms do not have overhead, you must allocate "support costs" instead of "overhead costs." Also, the allocations in this problem are to customer groups, not to an individual products or jobs. Nonetheless, the allocation process is the same. Just follow the three steps used in the lectures: 1. Read the problem and question carefully to determine the cost driver. 2. Compute the "overhead" rate: budgeted support costs / budgeted driver. 3. Allocate to the customer group specified in the question: overhead rate X driver for the specific customer group. Remember that with activity-based costing (Part B), there is more than one driver and more than one rate, and the allocation to a customer group is the sum of several individual allocations. Each part of the problem is worth five points, and you get five tries for each part. 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 Order processing Line item processing Store deliveries Carton handling Budgeted Cost $79,000 $65,000 Total Cost Driver 2,160 customer orders 24,940 line items $74,000 $75,000 1,490 deliveries 78,000 cartons shipped She also gathered the following data for a typical operating period:

Answer 1

Part A)

If the cost is to be allocated based on the customer orders , the allocation will be as under:

Total cost = $ 79,000 + 65,000 + 74,000 + 75,000 = $ 293,000

Total customer orders = 130 + 330 + 1,700 = 2,160

Cost allocation rate based on customer orders = Total cost / Total no. of customer orders

= $ 293,000 / 2,160 = $ 135.65 per customer order

Cost allocation to General Supermarket customers = $ 135.65 * 130 = $ 17,634

Part B)

If the cost is to be allocated based as per activity based costing system , the allocation will be as under:

Cost allocation rate for an activity = Total cost of activity / Cost driver

Cost allocation rate for Order processing cost = $ 79,000 / (130 + 330 + 1,700) = 36.57

Cost allocation rate for Line item processing cost = $ 65,000 / (1,950 + 4,290 + 18,700) = 2.61

Cost allocation rate for Store deliveries cost = $ 74,000 / ( 140 + 300 + 1,050) = 49.66

Cost allocation rate for Carton handling cost = $ 75,000 / ( 37,800 + 25,500 + 14,700) = 0.96

Cost allocation for an activity = Cost driver of a department for a activity * Cost allocation rate for an activity

There are 4 activities so there are 4 cost allocation rates, to calculate cost allocation for a department sum of cost allocations for all these 4 activities will be considered

Cost allocation to Ma & Pa customers = (36.57 * 1700) + (2.61 * 18,700) +  (49.66 * 1,050) + (0.96 * 14,700)

= $ 177,195