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 8%. For example, if a hospital buys supplies from Worley that cost Worley $100 to buy from manufacturers, Worley would charge the hospital $108 to purchase these supplies. For years, Worley believed that the 8% 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) Total Cost Total Activity Customer deliveries (Number of deliveries) $ 595,000 7,000 deliveries Manual order processing (Number of manual orders) 380,000 5,000 orders Electronic order processing (Number of electronic orders) 273,000 13,000 orders Line item picking (Number of line items picked) 726,000 440,000 line items Other organization-sustaining costs (None) 680,000 Total selling and administrative expenses $ 2,654,000 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 $32,000 to buy from manufacturers): Activity Activity Measure University Memorial Number of deliveries 17 26 Number of manual orders 0 44 Number of electronic orders 14 0 Number of line items picked 160 210 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 $32,000 cost of goods sold that Worley incurred serving each hospital.)

Answer 1

Answers, with workings

--Requirement 1

	University	Memorial	Total
Cost of purchase	$                             32,000.00	$               35,000.00	$                     67,000.00
Margin	8%	8%	8%
Total Revenue	$                             34,560.00	$               37,800.00	$                     72,360.00

--Requirement 2

Activity Cost Pool (Activity Measure)	Total Cost	Total Activity		Activity Rates
Customer deliveries (Number of deliveries)	$                           595,000.00	7000	deliveries	$                                                85.00	per deliveries
Manual order processing (Number of manual orders)	$                           380,000.00	5000	orders	$                                                76.00	per orders
Electronic order processing (Number of electronic orders)	$                           273,000.00	13000	orders	$                                                21.00	per orders
Line item picking (Number of line items picked)	$                           726,000.00	440000	line items	$                                                   1.65	per line items
Other organization-sustaining costs (None)	$                           680,000.00
Total to be allocated	$                       2,654,000.00

--Requirement 3

Overhead cost assigned to:
University	$                               2,003.00
Memorial	$                               5,900.50 or $ 5901

--Workings

UNIVERSITY
Activity Cost Pool (Activity Measure)	Total Cost	Activity Rates		No. of cost drivers	Cost Allocated
Customer deliveries (Number of deliveries)	$                           595,000.00	$                       85.00	per deliveries	17	$                     1,445.00
Manual order processing (Number of manual orders)	$                           380,000.00	$                       76.00	per orders	0	$                                  -
Electronic order processing (Number of electronic orders)	$                           273,000.00	$                       21.00	per orders	14	$                         294.00
Line item picking (Number of line items picked)	$                           726,000.00	$                          1.65	per line items	160	$                         264.00
Total Cost Allocated					$                     2,003.00
MEMORIAL
Activity Cost Pool (Activity Measure)	Total Cost	Activity Rates		No. of cost drivers	Cost Allocated
Customer deliveries (Number of deliveries)	$                           595,000.00	$                       85.00	per deliveries	26	$                     2,210.00
Manual order processing (Number of manual orders)	$                           380,000.00	$                       76.00	per orders	44	$                     3,344.00
Electronic order processing (Number of electronic orders)	$                           273,000.00	$                       21.00	per orders	0	$                                  -
Line item picking (Number of line items picked)	$                           726,000.00	$                          1.65	per line items	210	$                         346.50
Total Cost Allocated					$                     5,900.50

--Requirement 4

	University	Memorial
Total revenues	$                             34,560.00	$               37,800.00
Less:
Cost of Goods Sold	$                             32,000.00	$               35,000.00
Overhead cost allocated	$                               2,003.00	$                 5,900.50 or $ 5901
Margin	$                                   557.00	$               (3,100.50) or $ (3,101)