Question

M&M buys surgical supplies from manufacturers and resells these supplies to hospitals. In the face of declining profits, M&M decided to implement an activity-based costing system to improve its understanding of costs incurred to serve each hospital. The company broke its selling and administrative expenses into four activities as indicated:

Cost Pool	Cost Driver (activity Measure)	Total Cost	Total Activity
Customer Delivers	Number of Delivers	$   400,000	5,000 delivers
Electronic Order Processing	Number of Electronic Orders	$   300,000	12,000 orders
Manual Order Processing	Number of Manual Orders	$   200,000	4,000 orders
Line Item Picking	Number of line items picked	$   500,000	400,000 line items
Total SG&A Expense		$1,400,000

Cost Driver	City General	Country General
Number of Delivers	20	30
Number of Electronic Orders	2	40
Number of Manual Orders	10	2
Number of line items picked	100	260

a. Compute the activity rate for each cost pool

b. Compute the total activity cost that would be assigned to City General and County General respectively

Answer 1

Solution : A
	Calculation of the Cost Driver Rate
	Cost Driver Rate = Activity Cost / Cost Driver
			Activity Cost / Cost Driver =
	Activity	Cost Driver	Activity Cost	"/"	Cost Driver	" = " To	Cost Driver Rate
	Customer Deliveries	Number of Deliveries	$                     4,00,000	"/"	50,000	" = " To	$                      8.00
	Electronic Order Processing	Number of Electronic Orders	$                     3,00,000	"/"	12,000	" = " To	$                    25.00
	Manual Order Processing	Number of Manual Orders	$                     2,00,000	"/"	4,000	" = " To	$                    50.00
	Line Item Picking	Number of Line item Picked	$                     5,00,000	"/"	4,00,000	" = " To	$                      1.25
		Total	$                   14,00,000
Solution : B
	Calculation of the Cost allocation for Activity of City General
	Activity	Activity Used	"X " By	Cost Driver rate	Cost
	Number of Deliveries	20	"X " By	$                  8.00	$                         160
	Number of Electronic Orders	2	"X " By	$               25.00	$                           50
	Number of Manual Orders	10	"X " By	$               50.00	$                         500
	Number of Line item Picked	100	"X " By	$                  1.25	$                         125
		Total Cost			$                         835
	Calculation of the Cost allocation for Activity of County General
	Activity	Activity Used	"X " By	Cost Driver rate	Cost
	Number of Deliveries	30	"X " By	$                  8.00	$                         240
	Number of Electronic Orders	40	"X " By	$               25.00	$                     1,000
	Number of Manual Orders	2	"X " By	$               50.00	$                         100
	Number of Line item Picked	260	"X " By	$                  1.25	$                         325
		Total Cost			$                     1,665