Question

Product 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: Activity Budgeted Activity Cost Activity Base Scheduling and admitting $432,000 Number of patients Housekeeping 4,212,000 Number of patient days Nursing 5,376,000 Weighted care unit Total costs $10,020,000 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: Activity-Base Usage Procedure A Number of patients 280 Average length of stay x 6 days Patient days 1,680 Weighted care units 19,200 Procedure B Number of patients 650 Average length of stay x 5 days Patient days 3,250 Weighted care units 6,000 Procedure C Number of patients 1,200 Average length of stay x 4 days Patient days 4,800 Weighted care units 24,000 Private insurance reimburses the hospital for these activities at a fixed daily rate of $406 per patient day for all three procedures. Required: 1. Determine the activity rates. Activity Activity Rate Scheduling and admitting $ per patient Housekeeping $ per pd Nursing $ per wcu 2. Determine the activity cost for each procedure. Activity Total Activity Cost by Procedure Procedure A $ Procedure B $ Procedure C $ 3. Determine the excess or deficiency of reimbursements to activity cost. Activity Excess (deficiency) of reimbursement over activity cost Procedure A $ Procedure B $ Procedure C $ 4. Based on the determination of the excess or deficiency of reimbursement to activity cost, indicate which procedure cost is too high. Hospital management has decided to further investigate the nursing effort. Determine the weighted care units per patient days for each procedure. Round to one decimal place. Procedure A weighted care units per patient day Procedure B weighted care units per patient day Procedure C weighted care units per patient day

1,200 x 4 days patients Average length of stay Patient days Weighted care units 4,800 24,000 Private insurance reimburses the hospital for these activities at a fixed daily rate of $406 per patient day for all three procedures. Required: 1. Determine the activity rates. Activity Activity Rate Scheduling $ per and admitting patient Housekeeping per pd $ per Nursing wcu 2. Determine the activity cost for each procedure. Total Activity Cost by Activity Procedure Procedure Procedure Procedure 3. Determine the excess or deficiency of reimbursements to activity cost. Excess (deficiency) of reimbursement over Activity activity cost Procedure $ Procedure Procedure 4. Based on the determination of the excess or deficiency of reimbursement to activity cost, indicate which procedure cost is too high.

Answer 1

1	Activity rate=Budgeted activity cost/Budgeted activity base
	Activity			Budgeted activity cost	Activity base		Budgeted Activity base	Activity rate
				a			b	a/b
	Scheduling and admitting			432000	Number of patients		6000	72	Per patient
	Housekeeping			4212000	Number of patient days		27000	156	Per patient days
	Nursing			5376000	Weighted care unit		192000	28	Per weighted care unit
2	Activity cost=Actual activity base*Activity rate
	Procedure A:
	Activity			Activity base		Actual Activity base	Activity rate	Activity cost
						a	b	a*b
	Scheduling and admitting			Number of patients		280	72	20160
	Housekeeping			Number of patient days		1680	156	262080
	Nursing			Weighted care unit		19200	28	537600
	Total							819840
	Procedure B:
	Activity			Activity base		Actual Activity base	Activity rate	Activity cost
						a	b	a*b
	Scheduling and admitting			Number of patients		650	72	46800
	Housekeeping			Number of patient days		3250	156	507000
	Nursing			Weighted care unit		6000	28	168000
	Total							721800
	Procedure C:
	Activity			Activity base		Actual Activity base	Activity rate	Activity cost
						a	b	a*b
	Scheduling and admitting			Number of patients		1200	72	86400
	Housekeeping			Number of patient days		4800	156	748800
	Nursing			Weighted care unit		24000	28	672000
	Total							1507200
3	Excess or (deficiency) of reimbursement=Actual reimbursement-Activity cost
	Actual reimbursement=Patient days*Fixed daily rate
						Procedure A	Procedure B	Procedure C
	Patient days				a	1680	3250	4800
	Fixed daily rate				b	406	406	406
	Actual reimbursement				c=a*b	682080	1319500	1948800
	Activity cost				d	819840	721800	1507200
	Excess or (deficiency) of reimbursement				c-d	-137760	597700	441600
4	Procedure A has high cost since it has a deficiency of $ 137760
5	Weighted care units per patient days=Weighted care units/Patient days
						Procedure A	Procedure B	Procedure C
	Weighted care units				a	19200	6000	24000
	Patient days				b	1680	3250	4800
	Weighted care units per patient days				a/b	11.4	1.8	5.0