Stillwater Medical Center operates a cardiology care unit. Currently, all 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 inter¬

esting outcomes. First, the demands patients place on daily care services vary with the sever¬

ity of the case being treated. Second, the occupancy activity is a combination of two activi¬

ties: 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 dif¬

ference in demands resulting from differences in patient type.

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:

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 functionalbased approach of cost assignment.

2. Compute pool rates using the given activity drivers.
3. Compute the charge per patient day for each patient type using the pool rates from Re¬
quirement 2 and the demands on each activity.
4. Suppose that the product is defined as "stay and treatment" where the treatment is by¬
pass surgery. What additional information would you need to cost out this newly de¬
fined product?
5. Comment on the value of activity-based costing in service industries.

Transcribed Image Text:

Activity Cost of Activity Lodging $ 950,000 Activity Driver Patient days Quantity 7,500 Monitoring Feeding Nursing care 700,000 No. of monitoring devices used 10,000 150,000 Patient days 7,500 1,500,000 Nursing hours 75,000 $3,300,000 The demands associated with patient severity are also provided: Severity Patient Days Monitoring Devices High 2,500 5,000 Medium 3,750 4,000 Low 1,250 1,000 Nursing Hours 45,000 25,000 5,000