Question

Med Max buys surgical supplies from a variety of manufacturers and then resells and delivers these supplies to dozens of hospitals. In the face of declining profits, Med Max decided to implement an activity-based costing system to improve its understanding of the costs incurred to serve each hospital. The company broke its selling and administrative expenses into four activities as shown below: Activity Cost Pool Activity Measure Total Cost Total ActivityCustomer deliveries Number of deliveries $ 361,900 4,700Manual order processing Number of manual orders 266,400 3700 Electronic order processing Number of electronic orders 191,540 12200 Line item picking Number of line items picked 518,000 370000 Total selling and administrative expenses $ 1,337,840 Med Max gathered the data below for two of the many hospitals that it servesâCity General and County General: Activity Activity Measure City General County GeneralNumber of deliveries 15 30Number of manual orders 0 60 Number of electronic orders 20 0 Number of line items picked 130 290 Required: 1. Compute the activity rate for each activity cost pool. 2. Compute the total activity costs that would be assigned to City General and County General.

Answer 1

Results are below.

Step-by-step explanation:

First, we need to calculate the predetermined overhead rate for each activity:

Predetermined manufacturing overhead rate= total estimated overhead costs for the period/ total amount of allocation base

Customer deliveries= 361,900/4,700= $77 per delivery

Manual order processing= 266,400/3,700= $72 per manual order

Electronic order processing= 191,540/12,200= $15.7 per electronic order

Line item picking= 518,000/370,000= $1.4 per line item picked

Now, we can allocate costs to each hospital:

Allocated MOH= Estimated manufacturing overhead rate* Actual amount of allocation base

City general:

Customer deliveries= 77*15= 1,155

Electronic order processing= 15.7*20= 314

Line item picking= 1.4*130= 182

Total costs= $1,651

County General:

Customer deliveries= 77*30= 2,310

Manual order processing= 72*60= 4,320

Line item picking= 1.4*290= 406

Total costs= $7,036