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 had 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 below:

Worley gathered the data below for two of the many hospitals that it serves-University and Memorial (both hospitals purchased a total quantity of medical supplies that had cost Worley $30,000 to buy from its manufacturers): Required: 1. Compute the total revenue that Worley would receive from University and Memorial. 2. Compute the activity rate tor 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 $30,000 cost of goods sold that Worley incurred serving each hospital.) (Loss amount should be indicated with a minus sign.)

Answer 1

Concepts and reason

Service costing: It is the costing method to ascertain the costs and matching revenues from the services provided. The various service industries like transport services, supply services, hospital services and canteen services etc. use this method of costing to ascertain the costs and find out the profitable services or areas of service.

Fundamentals

Activity cost: The cost related to an activity is called as an activity cost. There are number of activities in a business to operate. There are 4 activities in the given business such as customer deliveries, manual order processing, electronic order processing and line items picking. There are two cost centers in the given business namely University and Memorial.

Activity rate: It is derived by dividing the activity expenses by the activity cost driver.

1.

Calculate the total revenue each from the University and Memorial as shown below:

$\begin{array}{c}\\{\rm{Total revenue = Cost of goods sold + 5\% mark - up}}\\\\{\rm{ = \$ 30,000 + 5\% of \$ 30,000}}\\\\{\rm{ = \$ 31,500}}\\\end{array}$

2.

Compute the activity rate for each activity cost pool as shown below:

3.

Compute the total activity costs that would be assigned to university and memorial as shown below:

4.

Compute W’s customer margin for university and memorial as shown below:

Ans: Part 1

Part 2

Part 3

Part 4