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.
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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	$83,000	1,840 customer orders
Line item processing	$59,000	20,000 line items
Store deliveries	$73,000	1,530 deliveries
Carton handling	$71,000	66,500 cartons shipped

She also gathered the following data for a typical operating period:

	General Supermarket	Drugstore Chains	Ma & Pa
Customer orders	150	390	1,300
Line items	1,800	3,900	14,300
Deliveries	100	280	1,150
Cartons shipped	28,000	22,400	16,100

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 General Supermarket customers?

Incorrect.

Tries 2/5

Previous Tries

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 Ma & Pa customers?

Answer 1

Part A)

Activity	Total cost
Order processing	83000
Line item processing	59000
Store deliveries	73000
Carton handling	71000
Total cost	286000
Total activity (Customer order)	1840
Activity rate [286000/1840]	$ 155.43 per customer order
Cost allocated to General Supermarket customers (actual activity used *activity rate)	150* 155.43 =$ 23315

B)

				COST ALLOCATED TO Ma & Pa customers
Activity	Total cost [A]	Estimated activity [B]	Activity rate [A/B]	ACTUAL activity	cost allocated (Actual activity *activity rate)
Order processing	83000	1840	83000/1840= $ 45.11 Per customer order	1300	58643
Line item processing	59000	20000	$ 2.95 per line item processed	14300	42185
Store deliveries	73000	1530	$47.71 per deliveries	1150	54866.5
Carton handling	71000	66500	$ 1.07 per carton shipped	16100	17227
TOTAL COST ALLOCATED TO Ma & Pa customers					172922