1. (Activity based costing) Mercy Memorial Community Hospital is under increasin
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Question
1. (Activity based costing) Mercy Memorial Community Hospital is under increasing pressure for the charges it assesses its patients. Except for an explicit consideration of direct costs for surgery, medication, and other treatments, the current pricing system is an ad hoc one based on pricing nouns for the geographical area. As the hospital controller, you have suggested that pricing would be less arbitrary if there were tighter relationship between costs and patient charges. As a first step, you have determined that most costs can be assigned to one of the following three cost pools.
Cost Pool
Amount
Activity Driver
Quantity
Professional Salaries
$900,000
Professional Hours
30,000 hours
Building Costs
450,000
Square feet used
15,000 square feet
Risk Management
320,000
Patients served
1,000 patients
Hospital services are classified into three broad categories. The services and their volume measures follow.
Service
Professional Hours
Square Feet
No. of patients
Surgery
6,000
1,200
200
Inpatient Care
20,000
12,000
500
Outpatient Care
4,000
1,800
300
Required:
a. Determine the allocation rate for each cost pool.
b. Allocate costs among the three hospital services using the allocation rates derived in part a.
c. What bases might be used as activity cost drivers to allocate the costs of the services among the patients served by the hospitals? Defend your selections.
Cost Pool
Amount
Activity Driver
Quantity
Professional Salaries
$900,000
Professional Hours
30,000 hours
Building Costs
450,000
Square feet used
15,000 square feet
Risk Management
320,000
Patients served
1,000 patients
Explanation / Answer
a. Allocation rate = Cost / Total Activity
Professional salaries = $900000 / 30000 = $30 per hour
Building cost = $45000 / 15000 = $3 per square feet
Risk management = $320000 / 1000 = $320 per patient
b. Cost allocated = Rate per activity * Activity used by each service
The costs is allocated below:
c. Under activity based costing, overhead cost are allocated on the basis of cost drivers. Cost drivers can be number of patients, number of beds, professional hours given by doctors to each patient, the number of pathelogical tests conducted etc.
Surgery Inpatient Care Outpatient Care Rate per cost driver ($) Activity Allocated Costs Activity Allocated Costs Activity Allocated Costs P)rofessional salaries 30 6000 180000 20000 600000 4000 120000 Building cost 3 1200 3600 12000 36000 1800 5400 Risk management 320 200 64000 500 160000 300 96000 Allocated Cost 247600 796000 221400Related Questions
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