Question

ASSIGNMENT 5.36 Department and activity-cost rates, service sector. Raynham's Radiology Center (RRC) performs X-rays, ultrasounds, computer tomography (CT) scans, and magnetic resonance imaging (MRI). RRC has developed a reputation as a top radiology center in the state. RRC has achieved this status because it constantly reexamines its processes and procedures. RRC has been using a single, facility-wide overhead allocation rate. The vice president of finance believes that RRC can make better process improvements if it uses more disaggregated cost information. She says, "We have state-of-the-art medical imaging technol- ogy. Can't we have state-of-the-art accounting technology?" Raynham's Radiology Center Budgeted Information for the Year Ended May 31, 2017 X-rays Ultrasound CT Scan MRI Total Technician labor $ 62,000 $101,000 $155,000 $ 103,000 $ 421,000 Depreciation 42,240 256,000 424,960 876,800 1,600,000 Materials 22.600 16 40 23,600 31,500 94,100 Administration 20,000 Maintenance 250,000 Sanitation 252,500 Utilities 151,100 $126,840 $373,400 $603,560 $1,011,300 $2,788,700 Number of procedures 3,842 2,482 Minutes to clean after each procedure 5 Minutes for each procedure 15 25 4,352 2,924 5 RRC operates at capacity. The proposed allocation bases for overhead are: Administration Maintenance (including parts) Number of procedures Capital cost of the equipment (use Depreciation) Total cleaning minutes Total procedure minutes Sanitation Utilities 1. Calculate the budgeted cost per service for X-rays, ultrasounds, CT scans, and MRI using direct tech- nician labor costs as the allocation basis. 2 Calculate the budgeted cost per service of X-rays, ultrasounds, CT scans, and MRI if RRC allocated overhead costs using activity-based costing. 3. Explain how the disaggregation of information could be helpful to RRC's intention to continuously im- prove its services. 5-37 Activity-based costing, merchandising. Pharmahelp, Inc., a distributor of special pharmaceutical products, operates at capacity and has three main market segments: a General cupermarket chains

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Answer 1

	1.)	Calculation of budgeted cost per service using direct Technician labour costs:-
		Costs	X-rays	Ultrasound	CT Scan	MRI	Total
		Technician labour	62,000	1,01,000	1,55,000	1,03,000	4,21,000
		Depreciation	42,240	2,56,000	4,24,960	8,76,800	16,00,000
		Materials	22,600	16,400	23,600	31,500	94,100
		Administration ( in the ratio of technician labour cost)	2,945	4,798	7,363	4,893	20,000
		Maintenance ( in the ratio of technician labour cost)	36,817	59,976	92,043	61,164	2,50,000
		Sanitation ( in the ratio of technician labour cost)	37,185	60,576	92,963	61,776	2,52,500
		Utilities ( in the ratio of technician labour cost)	22,252	36,250	55,631	36,967	1,51,100
		Total Cost	2,26,040	5,35,000	8,51,560	11,76,100	27,88,700
		No. of procedures	3,842	4,352	2,924	2,482
		Cost per Service                      ( Total Cost / No. of proecedures )	58.83	122.93	291.23	473.85
	2.)	Calculation of budgeted cost per service using activity based costing :-
		Costs	X-rays	Ultrasound	CT Scan	MRI	Total
		Technician labour	62,000	1,01,000	1,55,000	1,03,000	4,21,000
		Depreciation	42,240	2,56,000	4,24,960	8,76,800	16,00,000
		Materials	22,600	16,400	23,600	31,500	94,100
		Administration ( in the ratio of number of procedures)	5,650	6,400	4,300	3,650	20,000
		Maintenance ( in the ratio of depreciation)	6,600	40,000	66,400	1,37,000	2,50,000
		Sanitation ( in the ratio of cleaning mintues)	21,042	21,042	63,125	1,47,292	2,52,500
		Utilities ( in the ratio of procedures mintues)	8,888	26,665	44,441	71,106	1,51,100
		Total Cost	1,69,020	4,67,506	7,81,826	13,70,348	27,88,700
		No. of procedures	3,842	4,352	2,924	2,482
		Cost per Service                      ( Total Cost / No. of proecedures )	43.99	107.42	267.38	552.11
	3.)	Using traditional method of allocating common cost may lead to incorrect information for decision
		making purpose, as it can be different if we uses the appropriate method of allocation of common
		cost of activities on the basis of actual activities involved in different service. Such as activity based
		costing which allows to allocate cost of common activities on the basis of actual activities used in
		Services which will help in continuous improvement in it services.