Question

Medassist Inc., a distributor of special pharmaceutical products, operates at capacity and has three main market (A. general supermarket chains B. drugstore chains C. mom-and-pop single-store pharmacies) segments. Rick Flair, the new controller of Medassist, reported the following data for 2017 General Mom-and- Supermarket Drugstore Pop Single Medassist 2017 Chains Chains Stores Medassist Revenues $3,710,000 $3,190,000 $1,978,000 $8,878,000 Cost of goods sold 3,610,000 2,995,000 1,804,000 8,409,000 Gross margin $100,000 $195,000 $174,000 469,000 Other operating costs 294,825 Operating income $174,175 For many years, tMedassist has used gross margin percentage to evaluate the relative profitability of its market segments. But Flair recently attended a seminar on activity-based costing and is considering using it at Medassist to analyze and allocate "other operating costs." He meets with all the key managers and several of his operations and sales staff, and they agree that there are five key activities that drive other operating costs at Medassist: Activity Area Cost Driver Order processing Number of customer purchase orders Line-item processing Number of line items ordered by customers Delivering to stores Number of store deliveries Cartons shipped to store Number of cartons shipped Stocking of customer store shelves Hours of shelf-stocking Each customer order consists of one or more line items. A line item represents a single product (such asExtra-Strength Tylenol Tablets). Each product line item is delivered in one or more separate cartons. Each store delivery entails the delivery of one or more cartons of products to a customer. Medassist's staff stacks cartons directly onto display shelves in customers' stores. Currently, there is no additional charge to the customer for shelf-stocking and not all customers use Medassist for this activity. The level of each activity in the three market segments and the total cost incurred for each activity in 2017 is as follows: Activity-based Cost Data Activity Level Medassist 2017 General Mom-and- Total Cost Supermarket Drugstore Pop Single of Activity Activity Chains Chains Stores in 2017 Orders processed (number) 250 450 1,300 $90,000 Line-items ordered (number) 2,040 4,440 16,000 44,960 Store deliveries made (number) 110 250 1,015 75,625 Cartons shipped to stores (number) 36,000 25,000 14,000 75,000 Shelf stocking (hours) 360 190 110 9,240 $294,825 Requirements: 1. Compute the 2017 gross-margin percentage for each of Medassist's three market segments. 2. Compute the cost driver rates for each of the five activity areas. 3. Use the activity-based costing information to allocate the $294,825 of "other operating costs" to each of the market segments. Compute the operating income for each market segment. 4. Comment on the results. What new insights are available with theactivity-based costing information?

Answer 1

1. Gross Margin percentage for each of three market segments are as follows:

2. Cost Driver rates for each of the five activity areas is as follows:

3. Operating Income based on Activity Based costing is as follows:

4. If Gross Margin percentage is used in allocating the Indirect costs, the costs might be over allocated or under allocated to the segments.

But when the activity based costing is used, the costs are allocated based on the activity undertaken in the segment with their respective activity level in the segment.

By doing activity based costing, the indirect costs are fairly allocated to the segments and the income reflects the true income.

Hope this is helpful!!