Concept explainers
Pareto chart and cost of quality report for a service company
The administrator of Hope Hospital has been asked to perform an activity analysis of the emergency room (ER). The ER activities include cost of quality and other patient care activities. The lab tests and transportation are hospital services external to the ER for determining external failure costs. The result of the activity analysis is summarized as follows:
Activities | Activity Cost |
Patient registration | $ 6,400 |
Verifying patient information | 9,600 |
Assigning patients | 12,800 |
Searching/waiting for doctor | 8,000 |
Doctor exam | 4,800 |
Waiting for transport | 17,600 |
Transporting patients | 16,000 |
Verifying lab orders | 14,400 |
Searching for equipment | 8,000 |
Incorrect labs | 12,800 |
Lab tests | 17,600 |
Counting supplies | 19,200 |
Looking for supplies | 8,000 |
Staff training | 4,800 |
Total | $160,000 |
Instructions
1. Prepare a Pareto chart of the ER activities.
2. Classify the activities into prevention, appraisal, internal failure, external failure, and other patient care activities. Classify the activities into value-added and non-value-added activities.
3. Use the activity cost information to determine the percentages of total ER costs that are prevention, appraisal, internal failure, external failure, and other patient care activities.
4. Determine the percentages of the total ER costs that are value-added and non-value-added.
5. Interpret the information.
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Chapter 26 Solutions
Financial & Managerial Accounting
- Formation of an Activity Dictionary A hospital is in the process of implementing an ABC system. A pilot study is being done to assess the effects of the costing changes on specific products. Of particular interest is the cost of caring for patients who receive in-patient recovery treatment for illness, surgery (noncardiac), and injury. These patients are housed on the third and fourth floors of the hospital. The floors are dedicated to patient care and have only nursing stations and patient rooms. A partial transcript of an interview with the hospitals nursing supervisor is as follows: 1. How many nurses are in the hospital? There are 101 nurses, including me. 2. Of these 100 nurses, how many are assigned to the third and fourth floors? Fifty nurses are assigned to these two floors. 3. What do these nurses do (please describe)? Provide nursing care for patients, which, as you know, means answering questions, changing bandages, administering medicine, changing clothes, etc. 4. And what do you do? I supervise and coordinate all the nursing activity in the hospital. This includes surgery, maternity, the emergency room, and the two floors you mentioned. 5. What other lodging and care activities are done for the third and fourth floors by persons other than the nurses? The patients must be fed. The hospital cafeteria delivers meals. The laundry department picks up dirty clothing and bedding once each shift. The floors also have a physical therapist assigned to provide care on a physician-directed basis. 6. Do patients use any equipment? Yes. Mostly monitoring equipment. 7. Who or what uses the activity output? Patients. But there are different kinds of patients. On these two floors, we classify patients into three categories according to severity: intensive care, intermediate care, and normal care. The more severe the illness, the more activity is used. Nurses spend much more time with intermediate care patients than with normal care. The more severe patients tend to use more of the laundry service as well. Their clothing and bedding need to be changed more frequently. On the other hand, severe patients use less food. They eat fewer meals. Typically, we measure each patient type by the number of days of hospital stay. And you have to realize that the same patient contributes to each type of product. Required: Prepare an activity dictionary with three categories: activity name, activity description, and activity driver.arrow_forwardProduct costing and decision analysis for a service company Pleasant Stay Medical Inc. wishes to determine its product costs. Pleasant Stay offers a variety of medical procedures (operations) that are considered its products. The overhead has been separated into three major activities. The annual estimated activity costs and activity bases follow: Total patient days are determined by multiplying the number of patients by the average length of stay in the hospital. A weighted care unit (wcu) is a measure of nursing effort used to care for patients. There were 192,000 weighted care units estimated for the year. In addition, Pleasant Stay estimated 6,000 patients and 27,000 patient days for the year. (The average patient is expected to have a a little more than a four-day stay in the hospital.) During a portion of the year, Pleasant Stay collected patient information for three selected procedures, as follows: Private insurance reimburses the hospital for these activities at a fixed daily rate of 406 per patient day for all three procedures. Instructions Determine the activity rates. Determine the activity cost for each procedure. Determine the excess or deficiency of reimbursements to activity cost. Interpret your results.arrow_forwardThe Bienestar Cardiology Clinic has two major activities: diagnostic and treatment. The two activities use four resources: nursing, medical technicians, cardiologists, and equipment. Detailed interviews have provided the work distribution matrix shown below. The total time estimated corresponds to practical capacity (interviewers adjusted the total time to about 80 percent of the available time). The equipment time is measured in machine hours. Thus, the total time (at practical capacity) in the system is 20,000 hours. In considering the implementation of a TDABC model, the following unit times and transaction information are also provided: Required: 1. Calculate the cost of each activity using the indicated values of the resource drivers. 2. Calculate the capacity cost rate for TDABC. Using the capacity cost rate, calculate the cost of each activity under TDABC. Compare these values with those obtained in Requirement 1 and discuss possible reasons for any differences. 3. Suppose that the actual activity driver quantities are 3,500 and 9,000. Calculate the cost of unused capacity. 4. 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