Wolanin Pharmacy, part of a large chain of pharmacies, fills a variety of prescriptions for customers. The complexity of prescriptions filled by Wolanin varies widely; pharmacists can spend between five minutes to 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 in one day to be filled; the pharmacy considers this to be one order.
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 Wolanin has gathered the following information regarding two recent
pharmacy orders:
Customer Order Technician Number of Pharmacist
Number Hours Prescriptions Hours
1247.......................0.5...................3......................1.0
1248.......................0.5...................1......................2.5
Requirements
1. What is the traditional overhead rate based on the number of prescriptions?
2. How much pharmacy overhead would be allocated to customer order number 1247 if traditional overhead allocation based on the number of prescriptions is used?
3. How much pharmacy overhead would be allocated to customer order number 1248 if traditional overhead allocation based on the number of prescriptions is used?
4. What are the following cost pool allocation rates:
a. Pharmacy occupancy costs
b. Packaging supplies
c. Professional training and insurance costs
5. How much would be allocated to customer order number 1247 if activity-based costing (ABC) is used to allocate the pharmacy overhead costs?
6. How much would be allocated to customer order number 1248 if activity-based costing (ABC) is used to allocate the pharmacy overhead costs?
7. Which allocation method (traditional or activity-based costing) would produce a more accurate product cost? Explain your answer.

Transcribed Image Text:

Total Annual Estimated Cost Total Annual Estimated Cost Driver Activ Cost Pools Pharmacy occupancy costs (utilities, rent, Packaging supplies (bottles, bags, and Professional training and insurance costs Total pharmacy Cost Driver S 60,000 S 30,000 $100,000 Technician hours... 75,000 25,000 25,000 Number of prescriptions . . Pharmacist hours overhead $190,000