Question

ABC, Resource Drivers, Service Industry

Glencoe Medical Clinic operates a cardiology care unit and a maternity care unit. Colby Hepworth, the clinic’s administrator, is investigating the charges assigned to cardiology patients. Currently, all cardiology patients are charged the same rate per patient day for daily care services. Daily care services are broadly defined as occupancy, feeding, and nursing care. A recent study, however, revealed several interesting outcomes. First, the demands patients place on daily care services vary with the severity of the case being treated. Second, the occupancy activity is a combination of two activities: lodging and use of monitoring equipment. Since some patients require more monitoring than others, these activities should be separated. Third, the daily rate should reflect the difference in demands resulting from differences in patient type. Separating the occupancy activity into two separate activities also required the determination of the cost of each activity. Determining the costs of the monitoring activity was fairly easy because its costs were directly traceable. Lodging costs, however, are shared by two activities: lodging cardiology patients and lodging maternity care patients. The total lodging costs for the two activities were $5,936,000 per year and consisted of such items as building depreciation, building maintenance, and building utilities. The cardiology floor and the maternity floor each occupy 21,200 square feet. Hepworth determined that lodging costs would be assigned to each unit based on square feet.

To compute a daily rate that reflected the difference in demands, patients were placed in three categories according to illness severity, and the following annual data were collected:

Activity	Cost of Activity	Activity Driver	Quantity
Lodging	$ 700,200	Patient days	23,340
Monitoring	2,016,960	Monitoring hours used	30,560
Feeding	536,820	Patient days	23,340
Nursing care	4,490,000	Nursing hours	224,500
Total	7,743,980

The demands associated with patient severity are also provided:

Severity	Patient Days	Monitoring Hours	Nursing Hours
High	7,940	15,140	130,300
Medium	11,920	12,400	77,100
Low	3,480	3,020	17,100

Required:

1. Suppose that the costs of daily care are assigned using only patient days as the activity driver (which is also the measure of output). Compute the daily rate using this unit-based approach of cost assignment. If required, round your answer to the nearest cent.
$ per day

2. Compute activity rates using the given activity drivers (combine activities with the same driver). If required, round your answers to the nearest cent.

Rate 1	$ per patient day
Rate 2	$ per monitoring hour
Rate 3	$ per hour of nursing care

3. Compute the charge per patient day for each patient type using the activity rates from Requirement 2 and the demands on each activity. Round your interim calculations and final answers to the nearest cent.

High severity	$ per patient day
Medium severity	$ per patient day
Low severity	$ per patient day

Answer 1

Requirement (1) Daily Rate Using unit Based Approach : Total overhead (a) Number of Patient Days (b) $ 7,743,980 23340 $ 331.79 Requirement (2) Activity Lodging and Feeding Monitoring Nursing Care Overhead Cost $ 1,237,020 $ 2,016,960 $ 4,490,000 Activity Driver Activity Rate 23340 Patient Days $53.00 Per Patient Day 30560 Monitoring Hours $66.00 Per Monitoring Hour 224500 Nursing Hours $20.00 Per Nursing Hour $ 7,743,980 Requirement (3) Activity Lodging and Feeding Monitoring Nursing Care High Severity Activity Activity Rate Overhead cost 7940 $ 53.00 $ 420,820 15140 $ 66.00 $ 999,240 130300 $ 20.00 $ 2,606,000 Activity 11920 $ 12400 $ 3020 $ Medium Severity Low Severity Activity Rate Overhead cost Activity Activity Rate Overhead cost 53.00 $ 631,760 3480 $ 53.00 $ 184,440 66.00 $ 818,400 3020 $ 66.00 $ 199,320 20.00 $ 60,400 91180 $ 20.00 $ 1,823,600 $ $ Total Overhead Cost Number of Patient Days Daily Rate 4,026,060 7940 507.06 $ 1,510,560 11920 $ 126.72 2,207,360 3480 634.30 $ $ Note : Please comment down for any further clarifications.