Question

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:

Activity Cost Pool	Activity Measure	Total Cost		Total Activity
Customer deliveries	Number of deliveries	$	495,900	5,700	deliveries
Manual order processing	Number of manual orders		385,400	4,700	orders
Electronic order processing	Number of electronic orders		220,440	13,200	orders
Line item picking	Number of line items picked		540,500	470,000	line items
Total selling and administrative expenses		$	1,642,240

Med Max gathered the data below for two of the many hospitals that it serves—City General and County General:

	Activity
Activity Measure	City General	County General
Number of deliveries	15	30
Number of manual orders	0	60
Number of electronic orders	20	0
Number of line items picked	120	280

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.

Answer 1

Solution :

1. Activity Rate

Activity	Total Cost (a)	Total Activity (b)	Activity Rate (a / b)
Customer Deliveries	$ 495,900	5,700	$ 87
Manual Order Processing	$ 385,400	4,700	$ 82
Electronic Order Processing	$ 220,440	13,200	$ 16.7
Line Item Picking	$ 540,500	470,000	$ 1.15

2. Activity Cost to be Assigned :

Activity	Activity Rate	City General		Country General
		No. of Activity	Total Cost	No. of Activity	Total Cost
Customer Delivery	$ 87	15	$ 1,305	30	$ 2,610
Manual Order Processing	$ 82	0	0	60	$ 4,920
Electronic Order Processing	$ 16.7	20	$ 334	0	0
Line Item Picking	$ 1.15	120	$ 138	280	$ 322
Total Cost Assigned			$ 1,777		$ 7,852

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