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 5%. For example, if a hospital buys supplies from Worley that cost Worley $100 to buy from manufacturers, Worley would charge the hospital $105 to purchase these supplies. For years, Worley believed that the 5% 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) Customer deliveries (Number of deliveries) Manual order processing (Number of manual orders) Electronic order processing (Number of electronic orders) Line item picking (Number of line items picked) Other organization-sustaining costs (none) Total selling and administrative expenses Total Cost Total Activity $ 500,000 5,000 deliveries 248,000 4,000 orders 200,000 12,500 orders 450,000 450,000 line items 602,000 $2,000,000 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 $30,000 to buy from manufacturers): Activity Measure Number of deliveries Number of manual orders Number of electronic orders Number of line items picked Activity University Memorial 10 25 @ 30 15 © 120 250 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 $30,000 cost of goods sold that Worley incurred serving each hospital.)

Answer 1

Requirement 1 Computation of Revenue - Worley Company : Particulars Cost of goods sold Add : Mark up @ 5% Revenue University Memorial $30,000 $30,000 $1,500 $1,500 $31,500 $31,500 Requirement 2 Determination of activity rate for each activity: Activity Customer deliveries Manual order processing Electronic order processing Line tem picking Others Estimated Overhead Cost Activity Base $500,000 Nos of deliveries $248,000 Nos of manual orders $200,000 Nos of electronic orders $450,000 Nos of line item picked $602,000 No allocation Usage of Activity Base 5000 4000 125001 4500001 Activity Rate $100.00 Per Delivery $62.00 Per Manual order $16.00 Per Electronic order $1.00 Per line item picked Total $2,000,000.00 Requirement 3 Determination of Total Activity costs : Activity Customer deliveries Manual order processing Electronic order processing Line item picking Activity Pool University Activity rate Overhead Cost 101 $100.00 $1,000.00 0 $62.00 $0.00 15 $16.00 $240.00 120 $1.00 $120.00 Memorial Activity Pool Activity rate 251 $100.00 30 $62.00 0 $16.00 250 $1.00 Overhead Cost $2,500.00 $1,860.00 $0.00 $250.00 Total Activity Costs $1,360.00 $4,610.00 Requirement 4 Computation of Customer margin - Worley Company Particulars Sales Revenue Less : Cost of goods sold Gross Margin Less : Selling and administrative expenses Customer margin Universal $ $ $ $ $ Memorial 31,500.00 $ 31,500.00 30,000.00 $ 30,000.00 1,500.00 $ 1,500.00 1,360.00 $ 4,610.00 140.00 $ (3,110.00) Note : Please Comment down for any further clarifications