Anthony Pharmacy is part of a large chain of pharmacies. The complexity of presc

Question

Anthony Pharmacy is part of a large chain of pharmacies. The complexity of prescriptions filled by Anthony varies widely; pharmacists and their technicians 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 in each order. For example, a customer may bring in three prescriptions to be filled on the same day; the pharmacy considers this to be one order. Some orders come from walk-in customers and other orders come from an arrangement with a Health Maintenance Organization (HMO) to fill orders for its clients. Recently, the controller for the pharmacy chain told each pharmacy manager that he or she will need to decide whether to accept walk-in customers or HMO clients, but not both. Anthony Pharmacy's manager is exploring whether activity-based costing (ABC) may better allocate the pharmacy overhead costs to pharmacy orders than traditional costing allocation so that they can decide which type of order is more profitable. The controller has gathered the following information: The clerk for Anthony Pharmacy has gathered the following information regarding two recent pharmacy orders. Orders starting with "A" relate to walk-in customers and those starting with "B" relate to HMO clients. Answer the following questions. Each question is worth 1 point. Calculate the traditional overhead rate based on the number of prescriptions. Calculate the amount of overhead that would be charged to order #A1102 if traditional costing rates were used. Compute the Pharmacy Occupancy Costs cost pool allocation rate. How much overhead would be allocated to order #A1102 if activity-based costing was used? By how much is Order B2351 over- or under-costed when using traditional costing compared to ABC costing? Enter an over-costed amount as a positive number and under-costed

Explanation / Answer

1. Overhead rate = $229000/25000 = $9.16 per prescription

2. Amount of overhead to be charged to A1102 = 9.16 x 7

= 64.12

3. Calculation of cost pool Allocation rate

4. Overhead to be applied to A1102 = 0.5x1.2 + 7x1.4 + 2x4

= 18.40

Pharmacy occupation cost Packaging supplies Professiona training and insurance Total amount 98000 35000 96000 Cost drivers qty 82000 25000 24000 Cost per cost driver 1.20 1.4 4

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