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	$	426,400	5,200	deliveries
Manual order processing	Number of manual orders		323,400	4,200	orders
Electronic order processing	Number of electronic orders		205,740	12,700	orders
Line item picking	Number of line items picked		567,000	420,000	line items
Total selling and administrative expenses		$	1,522,540

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	20	40
Number of manual orders	0	80
Number of electronic orders	15	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

• Requirement 1: Activity rate calculation

Activity Cost Pool (Activity Measure)	Total Cost	Total Activity		Activity Rates
Customer deliveries (Number of deliveries)	$                           426,400.00	5200	deliveries	$                                                82.00	per deliveries
Manual order processing (Number of manual orders)	$                           323,400.00	4200	orders	$                                                77.00	per orders
Electronic order processing (Number of electronic orders)	$                           205,740.00	12700	orders	$                                                16.20	per orders
Line item picking (Number of line items picked)	$                           567,000.00	420000	line items	$                                                   1.35	per line items

• Requirement 2

Overhead cost assigned to:
City General	$                               2,045.00
County General	$                               9,818.00

--Working

CITY GENERAL
Activity Cost Pool (Activity Measure)	Total Cost	Activity Rates		No. of cost drivers	Cost Allocated
Customer deliveries (Number of deliveries)	$                           426,400.00	$                       82.00	per deliveries	20	$                     1,640.00
Manual order processing (Number of manual orders)	$                           323,400.00	$                       77.00	per orders	0	$                                  -
Electronic order processing (Number of electronic orders)	$                           205,740.00	$                       16.20	per orders	15	$                         243.00
Line item picking (Number of line items picked)	$                           567,000.00	$                          1.35	per line items	120	$                         162.00
Total Cost Allocated					$                     2,045.00
COUNTY GENERAL
Activity Cost Pool (Activity Measure)	Total Cost	Activity Rates		No. of cost drivers	Cost Allocated
Customer deliveries (Number of deliveries)	$                           426,400.00	$                       82.00	per deliveries	40	$                     3,280.00
Manual order processing (Number of manual orders)	$                           323,400.00	$                       77.00	per orders	80	$                     6,160.00
Electronic order processing (Number of electronic orders)	$                           205,740.00	$                       16.20	per orders	0	$                                  -
Line item picking (Number of line items picked)	$                           567,000.00	$                          1.35	per line items	280	$                         378.00
Total Cost Allocated					$                     9,818.00