Question

Technicians at Coastal Radiology Queensland (CRQ) conduct X-rays, ultrasounds, computed- tomography (CT) scans and magnetic resonance imaging (MRI). The management accountant has gathered the following information in preparation for the budget for the year to 30 June 2019. The costing system that management is using at CRQ has one cost driver, technicians’ remuneration, and costs are calculated per procedure. The management accountant is not sure that the system is reporting sufficiently accurate costs on which to base charges or to monitor performance.

Technicians’ remuneration Depreciation

Consumables
Administration
Maintenance
Cleaning
Utilities
Number of procedures
Duration of procedure in minutes Post-procedure cleaning time in

minutes

X-rays

120 000 55 000

41 500

3720 5 5

Ultrasounds

180 000 45 000

31 500

4535 15 5

CT scans 220 000 865 000

42 000

2780 20 10

MRI

250 000 1 650 000

57 000

3520 25 15

Indirect costs

380 000 565 000 454 500 247 000

Required
1. Apply the costing system in use at CRQ to calculate a cost per procedure.

2. Evaluate the costing system as a basis for charging patients and for monitoring performance.

3. Recommend a costing system that is capable of addressing issues raised in your evaluation.

   Note: apply the system that you have recommended.

4. ‘There’s no reason for me to get excited about the choice between the weighted-average and FIFO methods in my process-costing system. I have long-term contracts with my materials suppliers at fixed prices.’ Do you agree with this statement made by a plant controller? Explain your answer.

1. Process Costing and Activity Based Costing System (20 Marks) Technicians at Coastal Radiology Queensland (CRO) conduct X-rays, ultrasounds, computed- tomography (CT) scans and magnetic resonance imaging (MRI). The management accountant has gathered the following information in preparation for the budget for the year to 30 June 2019. The costing system that management is using at CRQ has one cost driver, technicians' remuneration, and costs are calculated per procedure. The management accountant is not sure that the system is reporting sufficiently accurate costs on which to base charges or to monitor performance. X-rays Ultrasounds CT MRI Indirect costs scans Technicians' remuneration 120 000 180 000 220 000 250 000 Depreciation 55 000 45 000 865 000 1 650 000 Consumables 41 500 31 500 42 000 57 000 Administration 380 000 Maintenance 565 000 Cleaning 454 500 Utilities 247 000 Number of procedures 3720 4535 2780 3520 Duration of procedure in minutes 5 15 20 25 Post-procedure cleaning time in 5 5 10 15 minutes Required 1. Apply the costing system in use at CRQ to calculate a cost per procedure. 2. Evaluate the costing system as a basis for charging patients and for monitoring performance. 3. Recommend a costing system that is capable of addressing issues raised in your evaluation. Note: apply the system that you have recommended. 4. There's no reason for me to get excited about the choice between the weighted-average and FIFO methods in my process-costing system. I have long-term contracts with my materials suppliers at fixed prices. Do you agree with this statement made by a plant controller? Explain your answer.

Answer 1

Available Information: Indirect Costs X-Rays Ultrasounds CT Scans MRI 120000 180000 220000 250000 55000 45000 865000 1650000 41500 315001 42000 57000 Technician Cost Depreciation Consumables Administration Maintenance Cleaning Utilities No of Procedures Cost Drived : Technicians Remuneration 380000 565000 454500 247000 3720 4535 2780 35201 1. Calculation of Cost per Procedure: MRI Remarks Total Cost 222.1088 71.02 468.75 16.19 Technician Cost Depreciation Consumables Administration Maintenance Cleaning Utilities Total Cost Per Procedure X-Rays Ultrasounds CT Scans 32.26 39.69 79.14 14.78 9.92 311.15 11.16 6.95 15.11 14.84 14.97 48.70 22.06 22.26 72.41 17.74 17.91 58.25 9.64 9.73 31.66 122.48 121.44 616.42 34.52 In the ratio of Technician Cost 51.33 in the ratio of Technician Cost 41.29 In the ratio of Technician Cost 22.44 in the ratio of Technician Cost 705.54 If we consider the current costing system as a basis for charging patients & for monitering performance, following deficiencies may be observed: 2. (i) All the Indirect costs are charged on the basis the cost driver "Technician remuneration", which is not a good cost driver. (ii) there could be multiple cost driver can be used for the calculation. Relationship of cost driver & cost must be direct. (iii) as we have sufficient information to calculate cost of each procedure. We should change our currect system of cost allocation

3. Recommandation for Costing System: First of all, we have to re-eveluate the Indirect costs & there Cost Driver. Indirect Costs Cost Driver Administration Duration of Procedure Maintenance Duration of Procedure Cleaning Post Procedure Cleaning Time Utilities Duration of Procedure Cost per Procedure as per Recommended system Technician Cost Depreciation Consumables Administration Maintenance Cleaning Utilities Total Cost Per Procedure X-Rays Ultrasounds CT Scans MRI Ratio 32.26 39.69 79.14 71.02 14.78 9.92 311.15 468.75 11.16 6.95 15.111 16.19 8.25 24.76 33.01 41.26 Duration of Procedure 12.27 36.81 49.08 61.35 Duration of Procedure 18.65 18.65 37.29 55.94 Post Procedure Cleaning Time 5.36 16.09 21.46 26.82 Duration of Procedure 102.73 152.87 546.24 741.34 X-Rays Total 5 Duration of Procedure in Minutes Post-Procedure claeaning time in Minutes Duration of all Procedures in Minutes Duration of all Post-Procedure claeaning time in Minutes MRI 25 15 88000 5 18600 18600 Ultrasounds CT Scans 15 20 5 10 68025 55600 22675 278001 65 35 230225 121875 52800 4. In the present system, the statement of plant controller is not at par. Since the cost driver is the only one, and we cant allocate all the expenses on that basis. even if medicine supplier is cost is fixed but there are other indirect costs which are to be allocated to each procedure. Hence the choice between weighted average & streightline must be carefully considered.