WEEK 3 PROBLEMS

Lehner Corporation has provided the following data from its activity-based costing accounting system:

  Indirect factory wages

$526,000  

  Factory equipment depreciation

$344,000  

Distribution of Resource Consumption across Activity Cost Pools:

Activity Cost Pools

Customer Orders

Product Processing

Other

Total

  Indirect factory wages

55%      

20%      

25%  

100%  

  Factory equipment depreciation

40%      

55%      

5%  

100%  

The "Other" activity cost pool consists of the costs of idle capacity and organization-sustaining costs that are not assigned to products.

How much indirect factory wages and factory equipment depreciation cost would NOT be assigned to products using the activity-based costing system?

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 8%. For example, if a hospital buys supplies from Worley that had cost Worley $100 to buy from manufacturers, Worley would charge the hospital $108 to purchase these supplies.

     For years, Worley believed that the 8% 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:

  Activity Cost Pool (Activity Measure)

Total Cost

Total Activity

  Customer deliveries (Number of deliveries)

$

340,000

4,000

 deliveries

  Manual order processing (Number of manual orders)

304,000

4,000

 orders

  Electronic order processing (Number of electronic orders)

312,000

13,000

 orders

  Line item picking (Number of line items picked)

594,000

440,000

 line items

  Other organization-sustaining costs (None)

610,000

  Total selling and administrative expenses

$

2,160,000

  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 $38,000 to buy from its manufacturers):

Activity

  Activity Measure

University

Memorial

  Number of deliveries

19            

20            

  Number of manual orders

0            

45            

  Number of electronic orders

11            

0            

  Number of line items picked

190            

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. (Round your answers to 2 decimal places.)

3.

Compute the total activity costs that would be assigned to University and Memorial. (Round your intermediate calculations and final answers to 2 decimal places.)

4.

Compute Worley’s customer margin for University and Memorial. (Hint: Do not overlook the $38,000 cost of goods sold that Worley incurred serving each hospital.) (Loss amount should be indicated with a minus sign. Round your intermediate calculations and final answers to 2 decimal places.)

SecuriCorp operates a fleet of armored cars that make scheduled pickups and deliveries in the Los Angeles area. The company is implementing an activity-based costing system that has four activity cost pools: Travel, Pickup and Delivery, Customer Service, and Other. The activity measures are miles for the Travel cost pool, number of pickups and deliveries for the Pickup and Delivery cost pool, and number of customers for the Customer Service cost pool. The Other cost pool has no activity measure because it is an organization-sustaining activity. The following costs will be assigned using the activity-based costing system:

  Driver and guard wages

$

1,100,000  

  Vehicle operating expense

530,000  

  Vehicle depreciation

410,000  

  Customer representative salaries and expenses

440,000  

  Office expenses

300,000  

  Administrative expenses

600,000  

  Total cost

$

3,380,000  

The distribution of resource consumption across the activity cost pools is as follows:

Travel  

Pickup and Delivery

Customer Service

Other

Totals  

  Driver and guard wages

50

%

35

%

10

%

5

%

100

%

  Vehicle operating expense

70

%

5

%

0

%

25

%

100

%

  Vehicle depreciation

60

%

15

%

0

%

25

%

100

%

  Customer representative salaries and expenses

0

%

0

%

90

%

10

%

100

%

  Office expenses

0

%

20

%

30

%

50

%

100

%

  Administrative expenses

0

%

5

%

60

%

35

%

100

%

Required:

Complete the first stage allocations of costs to activity cost pools.