A dialysis clinic provides two types of treatment for its patients. Hemodialysis
ID: 2332112 • Letter: A
Question
A dialysis clinic provides two types of treatment for its patients. Hemodialysis (HD), an in-house treatment, requires that patients visit the clinic three times each week for dialysis treatments. Peritoneal dialysis (PD) permits patients to self-administer their treatments at home on a daily basis. On average, the clinic serves 102 HD patients and 62 PD patients. A recent development caused clinic administrators to develop a keen interest in cost measurement for the two separate services. Managed care plans such as HMOs began to pay treatment providers a fixed payment per insured participant regardless of the level of services provided by the clinic. With fixed fee revenues, the clinic was forced to control costs to ensure profitability. As a result, knowing the cost to provide HD versus PD services was critically important for the clinic. It needed accurate cost measurements to answer the following questions. Were both services profitable, or was one service carrying the burden of the other service? Should advertising be directed toward acquiring HD or PD patients? Should the clinic eliminate HMO service?
Management suspected the existing cost allocation system was inaccurate in measuring the true cost of providing the respective services; it had been developed in response to Medicare reporting requirements. It allocated costs between HD and PD based on the ratio of cost to charges (RCC). In other words, RCC allocates indirect costs in proportion to revenues. To illustrate, consider the allocation of $884,480 of indirect nursing services costs, which are allocated to the two treatment groups in relation to the revenue generated by each group. Given that the clinic generated total revenue of $3,022,325, an allocation rate of 0.2926489 per revenue dollar was established ($884,480 ÷ $3,022,325). This rate was multiplied by the proportionate share of revenue generated by each service category to produce the following allocation.
Allocation Cost Type of Service HD PD Total Service Revenue x Allocation Rate - $1,813,395 x 0.2926489$530,688 0.2926489 353,792 $3,022,325 x 0.2926489 $884,480 1,208,930 To better assess the cost of providing each type of service, the clinic initiated an activity-based costing (ABC) system. The ABC approach divided the nursing service cost into four separate cost pools. A separate cost driver (allocation base) was identified for each cost pool. The cost pools and their respective cost drivers follow Total PD Nursing services cost pool categories RNS LPNs Nursing administration and support staff Dialysis machine operations (tech, salaries) $240, 350? 405,284? 116,188? 122,658? $884,480? Total Total HD PD Activity cost drivers (corresponding to cost pools) Number of RNs Number of LPNs Number of treatments (nursing administration) Number of dialyzer treatments (machine operations) 4 17 37,337 15,573 21,764 15,573 15,573Explanation / Answer
a.
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Working:
Allocated Cost Tasks HD PD 1 RNs 192280 48070 2 LPNs 333763 71521 3 Nursing administration & Support 48461 67727 4 Dialysis machine operations 122658 0Related Questions
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