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 5%. For example, if a hospital buys supplies from Worley that cost Worley $100 to buy from manufacturers, Worley would charge the hospital $105 to purchase these supplies.

For years, Worley believed that the 5% 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)	$	492,000	6,000	deliveries
Manual order processing (Number of manual orders)		504,000	7,000	orders
Electronic order processing (Number of electronic orders)		253,000	11,000	orders
Line item picking (Number of line items picked)		598,000	460,000	line items
Other organization-sustaining costs (None)		690,000
Total selling and administrative expenses	$	2,537,000

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 $31,000 to buy from manufacturers):

	Activity
Activity Measure	University	Memorial
Number of deliveries	15	26
Number of manual orders	0	48
Number of electronic orders	16	0
Number of line items picked	170	230

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 $31,000 cost of goods sold that Worley incurred serving each hospital.)

Answer 1

• All working forms part of the answer
• Requirement 1

	University	Memorial	Total
Cost of purchase	$                             31,000.00	$               31,000.00	$                     62,000.00
Margin	5%	5%	5%
Total Revenue	$                             32,550.00	$               32,550.00	$                     65,100.00

• Requirement 2

Activity Cost Pool (Activity Measure)	Total Cost	Total Activity		Activity Rates
Customer deliveries (Number of deliveries)	$                           492,000.00	6000	deliveries	$                                82.00	per deliveries
Manual order processing (Number of manual orders)	$                           504,000.00	7000	orders	$                                72.00	per orders
Electronic order processing (Number of electronic orders)	$                           253,000.00	11000	orders	$                                23.00	per orders
Line item picking (Number of line items picked)	$                           598,000.00	460000	line items	$                                  1.30	per line items
Other organization-sustaining costs (None)	$                           690,000.00
Total to be allocated	$                       2,537,000.00

• Requirement 3

Workings

UNIVERSITY
Activity Cost Pool (Activity Measure)	Total Cost	Activity Rates		No. of cost drivers	Cost Allocated
Customer deliveries (Number of deliveries)	$                           492,000.00	$                       82.00	per deliveries	15	$          1,230.00
Manual order processing (Number of manual orders)	$                           504,000.00	$                       72.00	per orders	0	$                       -
Electronic order processing (Number of electronic orders)	$                           253,000.00	$                       23.00	per orders	16	$              368.00
Line item picking (Number of line items picked)	$                           598,000.00	$                          1.30	per line items	170	$              221.00
Total Cost Allocated					$          1,819.00
MEMORIAL
Activity Cost Pool (Activity Measure)	Total Cost	Activity Rates		No. of cost drivers	Cost Allocated
Customer deliveries (Number of deliveries)	$                           492,000.00	$                       82.00	per deliveries	26	$          2,132.00
Manual order processing (Number of manual orders)	$                           504,000.00	$                       72.00	per orders	48	$          3,456.00
Electronic order processing (Number of electronic orders)	$                           253,000.00	$                       23.00	per orders	0	$                       -
Line item picking (Number of line items picked)	$                           598,000.00	$                          1.30	per line items	230	$              299.00
Total Cost Allocated					$          5,887.00

Answer

Overhead cost assigned to:
University	$                               1,819.00
Memorial	$                               5,887.00

• Requirement 4

	University	Memorial
Total revenues	$                             32,550.00	$               32,550.00
Less:
Cost of Goods Sold	$                             31,000.00	$               31,000.00
Overhead cost allocated	$                               1,819.00	$                 5,887.00
Margin	$                                 (269.00)	$               (4,337.00)