Concept explainers
ABC, health care. Crosstown Health Center runs two programs: drug addict rehabilitation and aftercare (counseling and support of patients after release from a mental hospital). The center’s budget for 2017 follows.
Professional salaries: | ||
4 physicians × $150,000 | $600,000 | |
12 psychologists × $75,000 | 900,000 | |
16 nurses × $30,000 | 480,000 | $1,980,000 |
Medical supplies | 242,000 | |
Rent and clinic maintenance | 138,600 | |
Administrative costs to manage patient charts, food, laundry | 484,000 | |
Laboratory services | 92,400 | |
Total | $2,937,000 |
Kim Yu, the director of the center, is keen on determining the cost of each program. Yu compiles the following data describing employee allocations to individual programs:
Yu has recently become aware of activity-based costing as a method to refine costing systems. She asks her accountant, Gus Gates, how she should apply this technique. Gates obtains the following budgeted
- a. Selecting cost-allocation bases that you believe are the most appropriate for allocating indirect costs to programs, calculate the budgeted indirect cost rates for medical supplies: rent and clinic maintenance; administrative costs for patient charts, food, and laundry; and laboratory services.
Required
- b. Using an activity-based costing approach to cost analysis, calculate the budgeted cost of each program and the budgeted cost per patient-year of the drug program.
- c. What benefits can Crosstown Health Center obtain by implementing the ABC system?
- 2. What factors, other than cost, do you think Crosstown Health Center should consider in allocating resources to its programs?
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