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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Cost classifications for a service company

A partial list of Foothills Medical Center's costs follows:

a. Cost of laundry services for operating room personnel

b. Salary of intensive care personnel

c. Depreciation on patient rooms

d. Cost of blood tests

e. Nurses' salaries

f. Cost of patient meals

g. Overtime incurred in the Patient Records Department due to a computer failure

h. Operating room supplies used on patients (catheters, sutures, etc.)

i. Doctor’s fee

j. Cost of X-ray test

k. Cost of maintaining the staff and visitors’ cafeteria

l. Cost of drugs used for patients

m. Cost of intravenous solutions used for patients

n. Cost of improvements on the employee parking lot

o. Salary of the nutritionist

p. General maintenance of the hospital

q. Cost of advertising hospital services on television

r. Cost of new heart wing s. Training costs for nurses

t. Depreciation of X-ray equipment

u. Utility costs of the hospital

Instructions

1. What would be Foothills Medical Center's most logical definition for the final cost object? Explain.

2. Identify whether each of the costs is to be classified as direct or indirect. For purposes of classifying each cost as direct or indirect, use the patient as the cost object.

(a)

To determine

Direct cost:

A cost indicates the payment of cash or the obligation to pay the cash in the future period for the generation of revenue or the service performed. A direct cost is the cost which is directly involved in the process of production. For example: The cost of plastic is the direct material for manufacturing a bottle.

Indirect cost:

An indirect cost is the cost which is indirectly involved in the process of production. For example: The salary of supervisor of a manufacturing business cannot be traced even though the supervisor contributes for the production.

Cost object:

A cost object is something to which costs are assigned, it is often a product lines or customers department for which costs are accumulated or measured by the management.

To explain: The most logical definition for the final cost object.

Explanation

Here patient is the most logical definition for the final cost object...

(b)

To determine

To classify: Each cost as either direct cost or indirect cost.

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