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Managerial Accounting: The Corners...

7th Edition
Maryanne M. Mowen + 2 others
ISBN: 9781337115773

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Managerial Accounting: The Corners...

7th Edition
Maryanne M. Mowen + 2 others
ISBN: 9781337115773
Textbook Problem
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The Two Cost Systems

Sacred Heart Hospital (SHH) faces skyrocketing nursing costs, all of which relate to its two biggest nursing service lines—the Emergency Room (ER) and the Operating Room (OR). SHH’s current cost system assigns total nursing costs to the ER and OR based on the number of patients serviced by each line. Total hospital annual nursing costs for these two lines are expected to equal $300,000. The table below shows expected patient volume for both lines.

Chapter 10, Problem 6MTC, The Two Cost Systems Sacred Heart Hospital (SHH) faces skyrocketing nursing costs, all of which

After discussion with several experienced nurses, Jack Bauer (SHH’s accountant) decided that assigning nursing costs to the two service lines based on the number of times that nurses must check patients’ vital signs might more closely match the underlying use of costly hospital resources. Therefore, for comparative purposes, Jack decided to develop a second cost system that assigns total nursing costs to the ER and OR based on the number of times nurses check patients’ vital signs. This system is referred to as the “vital-signs costing system.” The earlier table also shows data for vital signs checks for lines.

Using the results from Requirement 5, calculate the cost per OR nursing hour under the vital-signs costing system.

5. Calculate the amount of nursing costs that the vital-signs costing system assigns to the ER and to the OR.

To determine

Compute cost per nursing hour for OR department. In case, overall nursing cost is allocated to the department on the basis of vital sign checks.

Explanation

Traditional Costing:

Under traditional costing, overhead rates are computed by dividing the overhead cost by the cost driver. Cost driver could be labor hours, number of units, machine hours, and number of orders. Under traditional costing system a single rate is used to allocate all types of costs.

Allocation of nursing costs:

ParticularsOR ($)
Number of vital signs check (A)4,000
Rate per check1 (B)50
Nursing costs (A×B) (C)200,000
Nursing hours (D)5,000
Cost p

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