Activity Costing, Assigning Resource Costs, Primary and Secondary Activities Elm

Question

Activity Costing, Assigning Resource Costs, Primary and Secondary Activities Elmo Clinic has identified three activities for daily maternity care: occupancy and feeding, nursing, and nursing supervision. The nursing supervisor oversees 150 nurses, 25 of whom are maternity nurses (the other nurses are located in other care areas such as the emergency room and intensive care). The nursing supervisor has three assistants, a secretary, several offices, computers, phones, and furniture. The three assistants spend 75% of their time on the supervising activity and 25% of their time as surgical nurses. They each receive a salary of $60,000. The nursing supervisor has a salary of $80,000. She spends 100% of her time supervising. The secretary receives a salary of $35,000 per year. Other costs directly traceable to the supervisory activity (depreciation, utilities, phone, etc.) average $170,000 per year. Daily care output is measured as "patient days." The clinic has traditionally assigned the cost of daily care by using a daily rate (a rate per patient day). Daily rates can differ between units, but within units the daily rates are the same for all patients. Under the traditional approach, the daily rate is computed by dividing the annual costs of occupancy and feeding, nursing, and a share of supervision by the unit's capacity expressed in patient days. The cost of supervision is assigned to each care area based on the number of nurses. A single driver (patient days) is used to assign the costs of daily care to each patient. A pilot study has revealed that the demands for nursing care vary within the maternity unit, depending on the severity of a patient's case. Assume that the maternity unit has three levels of increasing severity: normal patients, cesarean patients, and patients with complications. The pilot study provided the following activity and cost information: The pilot study also revealed the following information concerning the three types of patients and their annual demands: Calculate the cost per patient day by using a functional-based approach. per patient day Calculate the cost per patient day by using an activity-based approach. (Round rates and unit cost to two decimal places.) Conceptual Connection: The hospital processes 1,250,000 pounds of laundry per year. The cost for the laundering activity is $600,000 per year. In a functional-based cost system, the cost of the laundry department is assigned to each user department in proportion to the pounds of laundry produced. Typically, maternity produces 240,000 pounds per year. How much would this change the cost per patient day calculated in Requirement 1? Round your answer to the nearest cent.

Explanation / Answer

A. Calculation of Number of Supervisor No. Of Nurses 150 No. Of Nurses supervise by a supervisor 3 No. Of Supervisor (150/3) 50 therefore No. Of Secretary 50 B. Calculation of Total Cost Amount in $ Occupation & Feeding         15,00,000 Nursing Care (maternity)         12,00,000 Other Cost Directly attributable           1,70,000 Supervisors Salary (80000X50)         40,00,000 Nurses Salary (60000X150)         90,00,000 Secratery Salary (35000X50)         17,50,000 Total Cost      176,20,000 1. Calculation of Total cost per patient Day Total Cost/Patient Day i.e. 176,20,000/10000 $ 1,762 per Patient Day 2. Calculation cost patient per day using Activity based costing Nursing Hrs Nursing Days Total Cost allocated in the ratio of Nursing hrs (amount in $) Cost patient/day (amount in $) Normal               17,500           7,000                                61,67,000                      881 Cesarian               12,500           2,000                                44,05,000                  2,203 Complications               20,000           1,000                                70,48,000                  7,048               50,000        10,000                              176,20,000 3. Conceptual Connection Laundary Process/year Pounds         12,50,000 Cost of Laundary Amount in $           6,00,000 Maternity Laundary Process Pounds           2,40,000 Cost of Maternity Laundry Amount in $           1,15,200 (600000/1250000X240000) Laundry Cost patient per day Amount in $                       60 (600000/10000) I.e Increase in Patient /day cost by $60 in case (1). I.e. Total Cost /patient day will be $ 1822.

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