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Managerial Accounting: The Corners...

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

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BuyFindarrow_forward

Managerial Accounting: The Corners...

7th Edition
Maryanne M. Mowen + 2 others
ISBN: 9781337115773
Textbook Problem
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Elmo Clinic has identified three activities for daily maternity care: occupancy and feeding, nursing, and nursing supervision. The nursing supervisor oversees 150 nurses, 25 of whom are maternity nurses (the other nurses are located in other care areas such as the emergency room and intensive care). The nursing supervisor has three assistants, a secretary, several offices, computers, phones, and furniture. The three assistants spend 75% of their time on the supervising activity and 25% of their time as surgical nurses. They each receive a salary of $60,000. The nursing supervisor has a salary of $80,000. She spends 100% of her time supervising. The secretary receives a salary of $35,000 per year. Other costs directly traceable to the supervisory activity (depreciation, utilities, phone, etc.) average $170,000 per year.

Daily care output is measured as “patient days.” The clinic has traditionally assigned the cost of daily care by using a daily rate (a rate per patient day). Daily rates can differ between units, but within units the daily rates are the same for all patients. Under the traditional approach, the daily rate is computed by dividing the annual costs of occupancy and feeding, nursing, and a share of supervision by the unit’s capacity expressed in patient days. The cost of supervision is assigned to each care area based on the number of nurses. A single driver (patient days) is used to assign the costs of daily care to each patient.

A pilot study has revealed that the demands for nursing care vary within the maternity unit, depending on the severity of a patient’s case. Assume that the maternity unit has three levels of increasing severity: normal patients, cesarean patients, and patients with complications. The pilot study provided the following activity and cost information:

Chapter 5, Problem 56P, Elmo Clinic has identified three activities for daily maternity care: occupancy and feeding, , example  1

The pilot study also revealed the following information concerning the three types of patients and their annual demands:

Chapter 5, Problem 56P, Elmo Clinic has identified three activities for daily maternity care: occupancy and feeding, , example  2

Required:

  1. 1. Calculate the cost per patient day by using a functional-based approach.
  2. 2. Calculate the cost per patient day by using an activity-based approach. (Round rates and unit cost to two decimal places.)
  3. 3. CONCEPTUAL CONNECTION The hospital processes 1,250,000 pounds of laundry per year. The cost for the laundering activity is $600,000 per year. In a functional-based cost system, the cost of the laundry department is assigned to each user department in proportion to the pounds of laundry produced. Typically, maternity produces 240,000 pounds per year. How much would this change the cost per patient day calculated in Requirement 1? Now, describe what information you would need to modify the calculation made in Requirement 2. Under what conditions would this activity calculation provide a more accurate cost assignment?

1.

To determine

Compute the cost per patient day with the help of functional-based approach.

Explanation

Activity Based Costing (ABC):

Activity based costing is a apportionment of costs that first considers the activity drivers that helps in the allocation of costs to various activities and then allocates costs to different cost objects by using the drivers.

Calculation of cost of supervision:

Particulars

Amount

($)

Salary of supervisor80,000
Salary of secretary35,000
Other costs170,000
Assistants (3×0

2.

To determine

Compute the value of cost per patient day with the help of activity-based approach.

3.

To determine

Identify the change in the cost in requirement 1. Discuss the resource that helps in change in modifying the calculations in requirement 2. Also, explain under what conditions this activity calculation would provide a more accurate cost assignment.

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