Question

# Med Max buys surgical supplies from a variety of manufacturers and then resells and delivers these...

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.

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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