Question

5-39 ABC, health care. Crosstown Health Center runs two programs: drug addict rehabilitation and after- care (counseling and support of patients after release from a mental hospital). The center's budget for 2017 follows. Professional salaries: 4 physicians X $150,000 $600,000 12 psychologists X $75,000 900,000 16 nurses X $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 follow- ing data describing employee allocations to individual programs: Drug Aftercare Total Employees Physicians Psychologists Nurses 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 information for 2017: Drug 9,000 Aftercare 12,000 Total 21,000 Square feet of space occupied by each program Patient-years of service Number of laboratory tests 60 110 1,400 700 2,100 1. 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. 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?

Answer 1

Answer :-

1)a) Calculation of the budgeted indirect cost rates for Medical supplies ; rent and clinic maintenance; administrative costs for patient charts, food and laundry; and laboratory services.

Medical supplies cost rates = Medical supplies cost / Total Patient years of service

Given , Medical supplies cost = $242,000

Total Patient years of service = 110

Medical supplies cost rates = $242,000 / 110

Medical supplies cost rates = $ 2200

Rent and clinic maintenance rates = Rent and clinic maintenance costs / Total square feet of space occupied by all program

Given , Rent and clinic maintenance costs = $ 138,600

Total square feet of space occupied by all program = 21000

Rent and clinic maintenance rates = $ 138,600 / 21000

Rent and Clinic maintenance rates = $ 6.6 per square feet

​​​​​​Administrative rates for patient charts, food and laundry = Administrative costs to manage patient charts, food and laundry / Total Patient years of service

Given, Administrative costs to manage patient charts,food and laundry = $ 484,000

Total Patient years of service = 110

Administratives rate = $ 484,000 / 110

Administratives rate = $ 4,400

Laboratory services rates = Laboratory services cost / Total Number of laboratory tests

Given, Laboratory services cost = $ 92,400

Total number of laboratory tests = 2100

Laboratory services rates = $ 92,400 / 2100

Laboratory services rates = $ 44

1)b)Calculation of the budgeted cost of each program, By using an activity - based costing approach :-

		Drug	After care	Total
Professional salaries:-
Physicians	(Physicians Salaries Per employee × Employee allocation to each program) Drug = $ 150,000 × 4 = $ 600,000 After care = 0 Total = $ 150,000 × 4 = $ 600,000	$600,000	-	$600,000
Psychologist	( Psychologist Salaries Per employee × Employee allocation to each program) Drug = $ 75,000 × 4 = $ 300,000 Aftercare = $ 75,000 × 8 = $ 600,000 Total = $ 75000 × 12 = $ 900,000	$300,000	$600,000	$900,000
Nurses	(Nurses Salaries Per employee × Employee allocation to each program) Drug = $ 30000 × 6 = $ 180,000 Aftercare = $ 30000 × 10 = $ 300,000 Total = $30000 × 16 = $480,000	$180,000	$300,000	$480,000
Total Professional salaries		$1,080,000	$900,000	$1,980,000
Medical Supplies	(Medical supplies rate × Patient years of service each program ) Medical supplies rate = $ 2200 Patient year of service - Drug - 50, After care - 60 , Total - 110	$110,000	$132,000	$242,000
Rent and Clinic maintenance	(Rent and clinic maintenance rate × square feet of space occupied by each program ) Rent and Clinic maintenance rate = $6.6	$ 59,400	$ 79,200	$ 138,600
Administratives cost	( Administratives rate × Patient years of service) Administratives rates = $ 4400	$ 220,000	$ 264,000	$ 484,000
Laboratory services	( Laboratory services rates × Number of laboratory tests ) Laboratory services rates = $ 44	$ 61,600	$ 30,800	$ 92,400
Total Costs		$1,531,000	$1,406,000	$2,937,000

Cost Per Patient years of the drug program = Total cost of Drug Program / Patient years of drug service

Cost Per Patient years of drug program = $ 1,531,000 / 50

Cost per patient years = $30,620

1)c) Benefits obtained by implementing the ABC systems are as follows -

By implementing the ABC systems Yu get more accurately allocated cost because it gain a more detailed understanding of cost of each program. This system was better, Yu should continue to use it as it help to determine which program are most costly to operate and this will be useful in making long term decision to which program will get offer or rejected.

2) Cost per patient years are basically used to allocate resources to each program . As Yu main objective is to cure patient by controlling costs .