Cushing Medical Clinic operates a cardiology care unit and a maternity care unit. Ned Carson, 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 $3,800,000 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. Carson 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

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 functional-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 “stay 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 Activity Driver Quantity Lodging Monitoring $1,900,000 1,400,000 Patient days 15,000 Monitoring hours used 20,000 Feeding 300,000 Patient days 15,000 Nursing care 3,000,000 Nursing hours 150,000 Total $6,600,000 The demands associated with patient severity are also provided: Severity Patient Days Monitoring Hours Nursing Hours High 5,000 10,000 90,000 Medium 7,500 8,000 50,000 Low 2,500 2,000 10,000