Question

Exercise 4.9 Compute and Use Activity Rates to Determine the Costs of Serving Customers [LO4-2, LO4-3] points 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: eBook 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 $ 400, eee 300,000 200,000 500, eco $1,400,000 Total Activity 5,000 deliveries 4,000 orders 12,500 orders 400,000 line items Print References 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 10 Activity Measure Number of deliveries Number of manual orders Number of electronic orders Number of line items picked 10 100 260 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. Complete this question by entering your answers in the tabs below. Required 1 Required 2 Compute the activity rate for each activity cost pool. (Round your answers to 2 decimal places.) Activity Cost Pool Customer deliveries Manual order processing Electronic order processing Line item picking Activity Rate per delivery per manual order per electronic order per line item picked Required 1 Required 2 >

Answer 1

1. Activity rate for each activity cost pool

Activity rate for each activity cost pool = Budgeted activity cost / Total budgeted activity base

Customer deliveries cost per delivery = Total customer delivery cost / Total number of deliveries = $400,000 / 5,000 deliveries = $80 per delivery.

order processing cost per order = Total order processing cost / Total number of orders = $300,000 / 4,000 orders = $75 per order.

Electronic order processing cost per order = Total electronic order processing cost / Total number of orders = $200,000 / 12,500 orders = $16 per order.

Line item picking cost per line item = Total line item picking cost / Total line items = $500,000 / 400,000 = $1.25 per line item.

b. Total Activity cost that would be assigned to City General and County General

Total activity cost that would be assigned to City General

Customer deliveries = ( Customer deliveries cost per delivery * Number of deliveries ) = ( $80 * 10 ) = $800.

Manual order processing = ( order processing cost per order * Number of manual orders ) = ( $75 * 0 ) = 0.

Electronic order processing = ( Electronic order processing cost per order * Number of electronic orders ) = ( $16 * 10 ) = $160.

Line item picking = ( Line item picking cost per line item * Number of line items ) = (1.25 * 100 ) = $125.

Total activity costs = $800 + $0 + $160 + $125 = $1,085.

Total activity cost that would be assigned to County General

Customer deliveries = ( Customer deliveries cost per delivery * Number of deliveries ) = ( $80 * 20 ) = $1,600.

Manual order processing = ( order processing cost per order * Number of manual orders ) = ( $75 * 40 ) = $3,000.

Electronic order processing = ( Electronic order processing cost per order * Number of electronic orders ) = ( $16 * 0 ) = $0.

Line item picking = ( Line item picking cost per line item * Number of line items ) = (1.25 * 260 ) = $325.

Total activity costs= $4,925.