ABC, Resource Drivers, Service Industry Glencoe Medical Clinic operates a cardiology care unit and a maternity care unit. Colby Hepworth, the clinic’s administrator, is investigating the charges assigned to cardiology patients. Currently, all cardiology patients are charged the same rate per patient day for daily care services. Daily care services are broadly defined as occupancy, feeding, and nursing care. A recent study, however, revealed several interesting outcomes. First, the demands patients place on daily care services vary with the severity of the case being treated. Second, the occupancy activity is a combination of two activities: lodging and use of monitoring equipment. Since some patients require more monitoring than others, these activities should be separated. Third, the daily rate should reflect the difference in demands resulting from differences in patient type. Separating the occupancy activity into two separate activities also required the determination of the cost of each activity. Determining the costs of the monitoring activity was fairly easy because its costs were directly traceable. Lodging costs, however, are shared by two activities: lodging cardiology patients and lodging maternity care patients. The total lodging costs for the two activities were $5,700,000 per year and consisted of such items as building depreciation, building maintenance, and building utilities. The cardiology floor and the maternity floor each occupy 20,000 square feet. Hepworth determined that lodging costs would be assigned to each unit based on square feet. To compute a daily rate that reflected the difference in demands, patients were placed in three categories according to illness severity, and the following annual data were collected: Activity Cost of Activity Activity Driver Quantity Lodging $ 2,850,000 Patient days 22,500 Monitoring 2,100,000 Monitoring hours used 30,000 Feeding 450,000 Patient days 22,500 Nursing care 4,500,000 Nursing hours 225,000 Total $ 9,900,000 The demands associated with patient severity are also provided: Severity Patient Days Monitoring Hours Nursing Hours High 7,500 15,000 135,000 Medium 11,250 12,000 75,000 Low 3,750 3,000 15,000 Required: 1. Suppose that the costs of daily care are assigned using only patient days as the activity driver (which is also the measure of output). Compute the daily rate using this unit-based approach of cost assignment. $ per day 2. Compute activity rates using the given activity drivers (combine activities with the same driver). If required, round your answers to the nearest cent. Rate 1 $ per patient day Rate 2 $ per monitoring hour Rate 3 $ per hour of nursing care 3. Compute the charge per patient day for each patient type using the activity rates from Requirement 2 and the demands on each activity. Round your interim calculations and final answers to the nearest cent. High severity $ per patient day Medium severity $ per patient day Low severity $ per patient day
Variance Analysis
In layman's terms, variance analysis is an analysis of a difference between planned and actual behavior. Variance analysis is mainly used by the companies to maintain a control over a business. After analyzing differences, companies find the reasons for the variance so that the necessary steps should be taken to correct that variance.
Standard Costing
The standard cost system is the expected cost per unit product manufactured and it helps in estimating the deviations and controlling them as well as fixing the selling price of the product. For example, it helps to plan the cost for the coming year on the various expenses.
ABC, Resource Drivers, Service Industry
Glencoe Medical Clinic operates a cardiology care unit and a maternity care unit. Colby Hepworth, the clinic’s administrator, is investigating the charges assigned to cardiology patients. Currently, all cardiology patients are charged the same rate per patient day for daily care services. Daily care services are broadly defined as occupancy, feeding, and nursing care. A recent study, however, revealed several interesting outcomes. First, the demands patients place on daily care services vary with the severity of the case being treated. Second, the occupancy activity is a combination of two activities: lodging and use of monitoring equipment. Since some patients require more monitoring than others, these activities should be separated. Third, the daily rate should reflect the difference in demands resulting from differences in patient type. Separating the occupancy activity into two separate activities also required the determination of the cost of each activity. Determining the costs of the monitoring activity was fairly easy because its costs were directly traceable. Lodging costs, however, are shared by two activities: lodging cardiology patients and lodging maternity care patients. The total lodging costs for the two activities were $5,700,000 per year and consisted of such items as building
To compute a daily rate that reflected the difference in demands, patients were placed in three categories according to illness severity, and the following annual data were collected:
| Activity | Cost of Activity | Activity Driver | Quantity |
| Lodging | $ 2,850,000 | Patient days | 22,500 |
| Monitoring | 2,100,000 | Monitoring hours used | 30,000 |
| Feeding | 450,000 | Patient days | 22,500 |
| Nursing care | 4,500,000 | Nursing hours | 225,000 |
| Total | $ 9,900,000 |
The demands associated with patient severity are also provided:
| Severity | Patient Days | Monitoring Hours | Nursing Hours |
| High | 7,500 | 15,000 | 135,000 |
| Medium | 11,250 | 12,000 | 75,000 |
| Low | 3,750 | 3,000 | 15,000 |
Required:
1. Suppose that the costs of daily care are assigned using only patient days as the activity driver (which is also the measure of output). Compute the daily rate using this unit-based approach of cost assignment.
$ per day
2. Compute activity rates using the given activity drivers (combine activities with the same driver). If required, round your answers to the nearest cent.
| Rate 1 | $ per patient day |
| Rate 2 | $ per monitoring hour |
| Rate 3 | $ per hour of nursing care |
3. Compute the charge per patient day for each patient type using the activity rates from Requirement 2 and the demands on each activity. Round your interim calculations and final answers to the nearest cent.
| High severity | $ per patient day |
| Medium severity | $ per patient day |
| Low severity | $ per patient day |
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