Question

Pharma Save Ltd specialises in the distribution of pharmaceutical products. It buys from pharmaceutical companies and re-sells to each of the three different distribution channels: (i) General supermarket chains, (ii) Drug store chains, and (iii) Individual chemist shops. The company plans to use activity-based costing for analysing the profitability of its distribution channels. The following data relates to the quarter ending March 2020.

	General	Drug store	Individual
Particulars	supermarket		chemist
		chains
	chains		shops
Average sales per delivery	$96,500	$32,450	$6,225
Average cost of goods sold per delivery	$94,650	$31,800	$5,950
Number of deliveries	960	2,470	8,570
Number of orders	1,000	2,650	9,500
Average number of cartons shipped per
delivery	250	75	12
Average number of hours of shelf stocking
per delivery	2	0.5	0.1

The following information is available in respect of operating costs (other than cost of goods sold) for the quarter ending March 2020.

Activity areas	Cost	Cost driver
Customer purchase order processing	$591,750	Purchase orders by customers
Customer store delivery	$960,000	Number of deliveries
		Number of cartons dispatched to
Cartons dispatched to customer stores	$792,135	customer stores
Shelf stocking at customer location	$80,240	Hours of shelf stocking

Required:

1. Calculate the activity cost driver rates for each of the activity areas.

2. Prepare an income statement showing details of each distribution channel for the quarter ending March 2020 using activity-based costing.

Answer 1