Concept explainers
Cost allocation in hospitals, alternative allocation criteria. Harold Monette vacationed at Lake Tahoe last winter. Unfortunately, he broke his ankle while skiing and spent two days at the Sierra University Hospital. Monette’s insurance company received a $4,950 bill for his two-day stay. One item that caught Monette’s attention was a $10.60 charge for a roll of cotton. Monette is a salesman for Johnson & Johnson and knows that the cost to the hospital of the roll of cotton is between $2.45 and $3.25. He asked for a breakdown of the $10.60 charge. The accounting office of the hospital sent him the following information:
a. Invoiced cost of cotton roll | $2.65 |
b. Cost of processing of paperwork for purchase | 0.57 |
c. Supplies-room management fee | 0.74 |
d. Operating-room and patient-room handling costs | 1.62 |
e. Administrative hospital costs | 1.06 |
f. University teaching-related costs | 0.61 |
g. Malpractice insurance costs | 1.18 |
h. Cost of treating uninsured patients | 1.52 |
i. Profit component | 0.65 |
Total | $10.60 |
Monette believes the overhead charge is outrageous. He comments, “There was nothing I could do about it. When they come in and dab your stitches, it’s not as if you can say, ‘Keep your cotton roll. I brought my own.’”
- 1. Compute the overhead rate Sierra University Hospital charged on the cotton roll.
Required
- 2. What criteria might Sierra use to justify allocation of the overhead items b–i in the preceding list? Examine each item separately and use the allocation criteria listed in Figure 14-8 (page 572) in your answer.
- 3. What should Monette do about the $10.60 charge for the cotton roll?
Want to see the full answer?
Check out a sample textbook solutionChapter 14 Solutions
COST ACCOUNTING
- - After closing her beloved restaurant due to the pandemic, Kiki started to sell her signature sauces to consumers. The ingredients for a sauce bottle cost $1.25 and packaging costs another $0.50. A distribution company handles the storage and distribution of the sauce and charges $0.75 or each bottle. Kiki has calculated that the overhead cost is $5000 per month. She sells one sauce bottle at $5.00 to the customers. a. How many sauce bottles must Kiki sell to break-even? What is the total revenue for breakeven? b. If she can sell only 1000 bottles, what should be the selling price to break-even?arrow_forwardKara Meyer, owner of Flower Power, operates a local chain of floral shops. Each shop has its own delivery van. Instead of charging a flat delivery fee, Meyer wants to set the delivery fee based on the distance driven to deliver the flowers. Meyer wants to separate the fixed and variable portions of her van operating costs so that she has a better idea how delivery distance affects these costs. She has the following data from the past seven months: (Click the icon to view the data.) Read the requirements. Requirement 1. Determine the company's cost equation (use the output from the Excel regression). (Ro y = x + Data table Month January.. February March April May June July Miles Driven 16,400 17,500 15,000 16,100 17,300 15,600 14,500 Print Van Operating Costs $5,480 $5,400 $4,950 $5,270 $5,740 $5,440 $4,680 Done - Xarrow_forwardA motor carrier is trying to determine its cost to pick up a shipment originating in Hot Springs, AR. The carrier dispatches a truck and trailer from Little Rock to pick up the load in Hot Springs. Little Rock is 50 miles from Hot Springs and the trip takes 1 hour. The driver arrives at the shipper and waits for 2 hours while the trailer is loaded. For this exercise the carrier is only concerned with the cost of driving from the terminal to Hot Springs and picking up the load (i.e., does not care about line-haul and delivery costs). Assume there are 30 days in a month. Use the information provided in the following table to determine how much it cost the carrier to pick up this load from Hot Springs: Equipment Purchase Price Tractor $80,000 (Monthly payment = $1,584) $35,000 (Monthly payment = $406) %3! Trailer %3D Depreciation Tractor 5-year straight line 10-ycar straight line Trailer Interest Tractor 7% APR for 5 years 7% APR for 10 years $5.00/gallon for diesel and the tractor gets…arrow_forward
- Ron Moss, a manager of Waterworks Inc., was reviewing the water bills of a dog daycare and spa. He determined that its highest and lowest bills of $3,800 and $2,400 were incurred in the months of May and November, respectively. If 400 dogs were washed in May and 200 dogs were washed in November, what was the estimated cost, If 500 dogs were washed in December? Group of answer choices are listed below: $ 3,735 $3,573 $3,100 $2,500arrow_forwardTim Urban, owner/manager of Urban's Motor Court in Key West, is considering outsourcing the daily room cleanup for his motel to Duffy's Maid Service. Tim rents an average of 50 rooms for each of 365 nights (365 × 50 equals the total rooms rented for the year). Tim's cost to clean a room is $12.50. The Duffy's Maid Service quote is $18.50 per room plus a fixed cost of $25,000 for sundry items such as uniforms with the motel's name.Tim's annual fixed cost for space, equipment, and supplies is $60,000. Based on the given information related to costs for each of the options, the crossover point for Tim =_________ room nights (round your response to the nearest whole number).arrow_forwardTim Urban, owner/manager of Urban's Motor Court in Key West, is considering outsourcing the daily room cleanup for his motel to Duffy's Maid Service. Tim rents an average of 50 rooms for each of 365 nights (365 x 50 equals the total rooms rented for the year). Tim's cost to clean a room is $13.00. The Duffy's Maid Service quote is $18.00 per room plus a fixed cost of $26,000 for sundry items such as uniforms with the motel's name. Tim's annual fixed cost for space, equipment, and supplies is $61,000. Based on the given information related to costs for each of the options, the crossover point for Tim = ☐ room nights (round your response to the nearest whole number).arrow_forward
- During the COVID-19 pandemic, many people decided to start making face masks and selling them on the Internet. Etsy, for example, sold face masks from many different sellers. Suppose that Mary decided to quit her job where she earned $3,600.00 per month. During the month of July 2020, Mary sold 1,100.00 masks at $7.00 per mask. The following table reports information for Mary's costs to make the face masks. Item Material Wages paid to one employee Utilities Internet advertising For the month of July 2020, Mary's revenue was $ Part 2 Mary's accounting profit was $ Part 3 Amount $3,300.00 $550.00 $110.00 $275.00 Mary's economic profit was $ . Make sure you include the negative sign if her profit is less than zero.arrow_forwardHoodys for Good manufactures and sells hooded sweatshirts. The company locates its manufacturing facilities in areas with high unemployment rates and provides on-site day care and education for its employees’ children. The company recently started a “one for one” program where, for each sweatshirt sold, it will donate one sweatshirt to an international charity to provide to a child in need. The customer pays the shipping cost for items purchased, but the company pays to ship to the international charities.Cost information is summarized below:Variable Costs Direct Materials $ 3.00 per unit produced Direct Labor $ 2.50 per unit produced Variable Manufacturing Overhead $ 0.50 per unit produced Shipping $ 3.00 per unit donated Fixed Costs Salaries $ 20,000 per month Advertising $ 60,000 per month Production Equipment $ 40,000 per monthRequired: Answer each of the following independent questions.1.Assume that the price of each sweatshirt sold is $30.a.How much contribution margin is earned…arrow_forwardDr. Claudia Gomez, a plastic surgeon, had just returned from a conference in which she learned of a new surgical procedure for removing wrinkles around eyes, reducing the time to perform the normal procedure by 50%. Given her patient-load pressures, Dr. Gomez is excited to try out the new technique. By decreasing the time spent on eye treatments or procedures, she can increase her total revenues by performing more services within a work period. In order to implement the new procedure, special equipment costing $88,800 is needed. The equipment has an expected life of 4 years, with a salvage value of $7,200. Dr. Gomez estimates that her cash revenues will increase by the following amounts: Year Revenue Increases 1. $23,760 2. $32,400 3. 38,880 4. 38,880 Conceptual Connection: Compute the NPV for the project, using 14% as the IRR.arrow_forward
- Dr. Whitley Avard, a plastic surgeon, had just returned from a conference in which she learned of a new surgical procedure for removing wrinkles around eyes, reducing the time to perform the normal procedure by 50%. Given her patient-load pressures, Dr. Avard is excited to try out the new technique. By decreasing the time spent on eye treatments or procedures, she can increase her total revenues by performing more services within a work period. In order to implement the new procedure, special equipment costing $74,000 is needed. The equipment has an expected life of 4 years, with a salvage value of $6,000. Dr. Avard estimates that her cash revenues will increase by the following amounts: Year Revenue Increases 1 $19,800 2 27,000 3 32,400 4 32,400 She also expects additional cash expenses amounting to $3,000 per year. The cost of capital is 12%. Assume that there are no income taxes. Required: 1. Compute the payback period for the new equipment. Round your…arrow_forwardWhat is the fixed cost of the autoclave equipment? (Round answer to 2 decimal places, e.g. 52.75.) Fixed cost $ After graduating from dental school two years ago, Dr. Lauren Farish purchased the dental practice of a long-time dentist who was retiring. In January of this year, she had to replace the outdated autoclave equipment she inherited from the previous dentist. Now, as she is preparing her budget for next year, she is concerned about understanding how her cost for sterilizing her dental instruments has changed. She has gathered the following information from her records: Month Number of instruments used Total autoclave cost January 850 $7,600 February 750 6,800 March 920 8,200 April 950 8,600 May 1,150 9,900 June 900 8,100 July 1,050 9,600 August 975 8,700arrow_forwardA capitated managed care agreement with the city will bring in 400.00/month for 20 city employees, regardless if they are sick or not. Using differential cost analysis how do you calculate the full cost gain/loss and the differential cost gain/loss for two scenarios: keeping the agreement and killing the agreement?arrow_forward
- Cornerstones of Cost Management (Cornerstones Ser...AccountingISBN:9781305970663Author:Don R. Hansen, Maryanne M. MowenPublisher:Cengage Learning