Product costing and decision analysis for a service company OBJ. 6 Pleasant Stay Medical Inc. wishes to determine its product costs. Pleasant Stay offers a variety of medical procedures (operations) that are considered its “products.” The overhead has been separated into three major activities. The annual estimated activity costs and activity bases follow:

Activity Budgeted Activity Cost Activity Base Scheduling and admitting $ 432,000 Number of patients Housekeeping 4,212,000 Number of patient days Nursing 5,376,000 Weighted care unit __________ Total costs $10,020,000 __________ __________ Total “patient days” are determined by multiplying the number of patients by the average length of stay in the hospital. A weighted care unit (wcu) is a measure of nursing effort used to care for patients. There were 192,000 weighted care units estimated for the year. In addition, Pleasant Stay estimated 6,000 patients and 27,000 patient days for the year. (The average patient is expected to have a a little more than a four-day stay in the hospital.)

During a portion of the year, Pleasant Stay collected patient information for three selected procedures, as follows:

Activity-Base Usage Procedure A Number of patients 280 Average length of stay 3 6 days _____ Patient days 1,680 _____ _____ Weighted care units 19,200 Procedure B Number of patients 650 Average length of stay 3 5 days _____ Patient days 3,250 _____ _____ Weighted care units 6,000 Procedure C Number of patients 1,200 Average length of stay 3 4 days _____ Patient days 4,800 _____ _____ Weighted care units 24,000 Private insurance reimburses the hospital for these activities at a fixed daily rate of

$406 per patient day for all three procedures.

Instructions 1. Determine the activity rates.

2. Determine the activity cost for each procedure.

3. Determine the excess or deficiency of reimbursements to activity cost.

4. Interpret your results.