Chapter 7, Problem 10E

To determine

The Activity rate based on activity measures for each activity pool.

Answer to Problem 10E

Solution: The Statement showing the activity rate for each activity cost pool shall be follows:

Here, Other organization-sustaining cost is a pool which is not allocated to products as it is related to sustaining of the organization which is not directly related to products.

Explanation of Solution

Given: The Estimated overheads of the activity and expected activity of each activity pool have been given in the problem.

Formula: The formula used in the given problem for computing the activity rate is as follows:

Activity rate = $\frac{\text{Estimated overheads cost}}{\text{Expected Activity}}$

Calculation: The Computation for activity rate for each activity pool shall be computed as follows:

Customer Deliveries: $\frac{\text{Estimated overheads cost}}{\text{Number of Deliveries}}$

= $\frac{\$500,000}{5,000 deliveries}$ = $100 per delivery

Manual Order processing: $\frac{\text{Estimated overheads cost}}{Manual Order}$

= $\frac{\$248,000}{4,000 manual orders}$ = $62 per manual order

Electronic Order processing: $\frac{\text{Estimated overheads cost}}{\text{Electronic order}}$

= $\frac{\$200,000}{12,500 electronic order}$ = $16 per electronic order

Line item picking: $\frac{\text{Estimated overheads cost}}{Number of line items}$

= $\frac{\$450,000}{450,000 items}$ = $1.00 per line item

The Activity rate is computed by dividing the estimated overheads with the expected activity based on measures determined for the respective activity pool.

The activity related to organization sustainability shall not allocated o product as it is related to organization as a whole and cannot be directly allocated to product.

Conclusion

To conclude, the activity rate is based on actual overheads incurred and activity measures undertaken during the period.

Requirement3:

To determine

The Activity cost assigned to Hospitals University and Memorial.

Answer to Problem 10E

Solution: The Statement showing the assignment of activity cost to both the hospitals shall be computed as follows:

Explanation of Solution

Given: The Activity rate of each activity cost pool and actual activity undertaken under each of both the hospitals have been given in the problem.

Calculation: The Computation for assignment of activity cost of each pool under both the hospitals has been explained as under:

Customer deliveries (based on number of deliveries):

University (10 deliveries@$100): $ 1,000

Memorial (25 deliveries@ $100): $ 2,500

Manual order Processing (based on manual order):

Memorial (30 orders @ $62): $1,860

Electronic Order Processing (Based on Electronic order):

University (15 orders @ $16): $240

Line item Picking (based onnumber of line items):

University (120 items @$ 1.00): $120

Memorial (250 items @ $1.00): $ 250

The activity cost assigned for each activity shall be computed by multiplying the actual activity undertaken for each jobs with the activity rate for respective activity pool.

Conclusion

To conclude, it must be said that overheads are assigned on the basis of actual activity undertaken for the products.

Requirement4:

To determine

The customer margin of each hospital.

Answer to Problem 10E

Solution: The statement showing customer margin for each hospital shall be computed as follows:

Explanation of Solution

The activity cost assigned and cost of goods sold and revenue generated from each hospital has been given in the problem. The Customer margin shall be computed by deducting the cost of goods sold and activity cost assigned to hospitals from sales revenue generated from each hospital.

Other organizational cost relating to organizational sustainability shall not be deducted from the customer margin as it is not related to customer but to the organization as a whole.

Conclusion

To conclude, it must be said that the customer margin is net of revenue and cost of goods sold and activity cost assigned.

Requirement5:

To determine

The purchasing behavior of the hospitals

Answer to Problem 10E

Solution: The purchasing memorial is somehow not desirable and least profitable as it is apparent from the computation of customer margin. The Memorial hospital is incurring a loss of $3,110 due to purchasing behavior.

Explanation of Solution

The Purchasing behavior of Memorial is not desirable in the sense that it is based on manual order processing rather than electronic order processing, which resulted in higher order processing cost. Moreover, the hospital believes in placing large number of orders of small quantities resulting higher deliverable charges. This overall resulted in decrease in customer margin as compared to University hospital.

Conclusion

To conclude, it must be said that the Purchasing behavior of the customer will affect the customer margin generated.