Question

Suppose the Burlington Donor Clinic of Canadian Blood Services has identified an individual blood drive as its cost object. It has established the following cost pools in developing an activity-based costing system:

Non-medical personnel costs. Salaries and wages of the office staff who organize blood drives and keep donor records.

Medical personnel costs. Salaries and wages of doctors and nurses who staff a blood drive.

Medical supplies. Cost of needles, bandages, and containers for donated blood.

Non-medical supplies. Costs of refreshments for blood donors and recordkeeping supplies.

Blood drives typically require 5 to 7 beds for blood donors. Each donation requires one container (in the medical supplies cost pool), one needle, and one set of bandages. Canadian Blood Services normally receives donated space from a community organization (such as a university or company) for each blood drive. Non-medical personnel costs would be most appropriately allocated using:

a. Number of blood drives organized

b. Number of blood donors

c. Hours available for blood donations

d. Dollar value of blood donated

Answer 1

a.Number of blood drives organized (allocation basis for non-medical personnel cost)

The Activity Based Costing (ABC) approach relates indirect cost to the activities that drive them to be incurred. The formula for determining overhead rate under activity-based costing is the total of cost pool divided by cost driver, which yields the cost driver rate. In this case cost pool is the salaries and wages paid to the staff who organize the blood drive and keep records and the cost driver is the number of blood drives organized.

Cost driver is any factor which causes a change in the cost of an activity. Salaries and wages paid to the staff organizing the blood drive differ with a change in the number of blood drives organized and participated by them.Hence, number of blood drives organized is the cost driver based on which cost are to be allocated.

Number of blood donors cannot be taken as a cost driver since payment to non medical staff are not based on the blood donors participating in a drive.Similar is the case for Hours available for blood donation and Dollar value of blood donated.