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 $5,700,000 per year and consisted of such items as building depreciation, building maintenance, and building utilities. The cardiology floor and the maternity floor each occupy 20,000 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:

The demands associated with patient severity are also provided:

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.
2. Compute activity rates using the given activity drivers (combine activities with the same driver).
3. Compute the charge per patient day for each patient type using the activity rates from Requirement 2 and the demands on each activity.
4. Suppose that the product is defined as €œstay and treatment€ where the treatment is bypass surgery. What additional information would you need to cost out this newly defined product?
5. Comment on the value of activity-based costing in service industries.

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Activity Cost of Activity Lodging Monitoring Feeding Nursing care Activity Driver Patient days Monitoring hours used Patient days Nursing hours Quantity 22,500 30,000 22,500 225,000 $2,850,000 2,100,000 450,000 4,500,000 $9,900,000 Total Severity Patient Days High Medium Low 7,500 11,250 3,750 Monitoring Hours 15,000 12,000 3,000 Nursing Hours 135,000 75,000 15,000