Question

Worley Company buys surgical supplies from a variety of manufacturers and then resells and delivers these supplies to hundreds of hospitals. Worley sets its prices for all hospitals by marking up its cost of goods sold to those hospitals by 6%. For example, if a hospital buys supplies from Worley that cost Worley $100 to buy from manufacturers, Worley would charge the hospital $106 to purchase these supplies. For years, Worley believed that the 6% markup covered its selling and administrative expenses and provided a reasonable profit. However, in the face of declining profits, Worley decided to implement an activity-based costing system to help improve its understanding of customer profitability. The company broke its selling and administrative expenses into five activities as shown: Activity Cost Pool (Activity Measure) Total Cost Total Activity Customer deliveries (Number of deliveries) $ 522,000 6,000 deliveries Manual order processing (Number of manual orders) 504,000 7,000 orders Electronic order processing (Number of electronic orders) 280,000 14,000 orders Line item picking (Number of line items picked) 738,000 410,000 line items Other organization-sustaining costs (None) 680,000 Total selling and administrative expenses $ 2,724,000 Worley gathered the data below for two of the many hospitals that it serves—University and Memorial (each hospital purchased medical supplies that had cost Worley $37,000 to buy from manufacturers): Activity Activity Measure University Memorial Number of deliveries 17 29 Number of manual orders 0 47 Number of electronic orders 13 0 Number of line items picked 190 230 Required: 1. Compute the total revenue that Worley would receive from University and Memorial. 2. Compute the activity rate for each activity cost pool. 3. Compute the total activity costs that would be assigned to University and Memorial. 4. Compute Worley’s customer margin for University and Memorial. (Hint: Do not overlook the $37,000 cost of goods sold that Worley incurred serving each hospital.

Answer 1

Solution 1:

Computation of Revenue - Worley Company Particulars Universal Memorial Cost of goods sold $37,000.00 $37,000.00 Markup (6%) $2,220.00 $2,220.00 Revenue $39,220.00 $39,220.00) Sheet662 (2) Sheet157 (34) Sheet31 (5) Sheet73 Sheet81 Sheet84 Sheet112 ILI O s.

Solution 2 and 3:

Activity $1,479. Customer deliveries Manual order processing Electronic order processing Line item picking Others Determination of activity rate for each activity & allocation of overhead University Memorial Estimated Overhead Cost Activity Base Usage of Activity Base Activity Rate Usage Allocated Costs Usage Allocated Costs $522,000.00 Nos of deliveries 6000 $87.00 17 $1,479.00 29 $2,523.00 $504,000.00 Nos of manual orders 7000 $72.00 0 $0.00 47 $3,384.00 $280,000.00 Nos of electronic orders 14000 $20.00 13 $260.00 0 $0.00 $738,000.00 Nos of line item picked 410000 $1.80 190 $342.00 230 $414.00 $680,000.00 No allocation 11 13 Total $2,724,000.00 $2,081.00 $6,321.00 16 17 18 21 23 25 26 27 28 20 Sheet662 (2) Sheet157 (34) Sheet31 (5) Sheet73 Sheet81 Sheet84 Sheet112 (5)

Solution 4:

Q R S T 11 12 13 14 15 16 17 Computation of Customer margin - Worley Company Particulars Universal Memorial Sales Revenue $39,220.00 $39,220.00 Cost of goods sold $37,000.00 $37,000.00 Gross Margin $2,220.00 $2,220.00 Selling and administrative expenses $2,081.00 $6,321.00 Customer margin $139.00 -$4,101.00 19 20 21 22 23 24 25 26 27 28 Sheet662 (2) Sheet157 (34) Sheet31 (5) Sheet73 ) Sheet81 ) Sheet84 Sheet112 (5)