Chapter 4, Problem 4.34BE

Compare traditional and ABC cost allocations at a pharmacy (Learning Objective 2)

Gracen Pharmacy, part of a large chain of pharmacies, fills a variety of prescriptions for customers. The complexity of prescriptions filled by Gracen varies widely; pharmacists can spend between five minutes and six hours on a prescription order. Traditionally, the pharmacy has allocated its overhead based on the number of prescriptions.

The pharmacy chain’s controller is exploring whether activity-based costing (ABC) may better allocate the pharmacy overhead costs to pharmacy orders. The controller has gathered the following information:

The clerk for Gracen Pharmacy has gathered the following information regarding two recent pharmacy orders:

Requirements

1. 1. What is the traditional overhead rate based on the number of prescriptions?
2. 2. How much pharmacy overhead would be allocated to customer order number 1102 if traditional overhead allocation based on the number of prescriptions is used?
3. 1. How much pharmacy overhead would be allocated to customer order number 1103 if traditional overhead allocation based on the number of prescriptions is used?
4. 2. What are the following cost pool allocation rates?
   1. a. Pharmacy occupancy costs
   2. b. Packing supplies
   3. c. Professional training and insurance costs
5. 3. How much would be allocated to customer order number 1102 if activity-based costing (ABC) is used to allocate the pharmacy overhead costs?
6. 4. How much would be allocated to customer order number 1103 if activity-based costing (ABC) is used to allocate the pharmacy overhead costs?
7. 5. Which allocation method (traditional or activity-based costing) would produce a more accurate product cost? Explain your answer.