St. Sophia’s Hospital is preparing its budget for the coming year. It uses an activity-based approach for all costs except physician care. Its emergency room has three activity areas with cost drivers as follows:

1. Reception—paperwork of incoming patients. Cost driver is the number of forms completed.

2. Treatment—initial diagnosis and treatment of patients. Cost driver is the number of diagnoses treated.

3. Cleaning—general cleaning plus preparing treatment facilities for next patient. Cost driver is the number of people visiting emergency room (patients plus person(s) accompanying them).

Required

a. Prepare the total budgeted cost for each activity.

b. How might you adjust the budget approach if you found that outpatients were kept in the emergency room for one hour on average while admitted patients remained for two hours?

c. What advantage does an activity-based approach have over the hospital’s former budgeting method of basing the next year’s budget on the last year’s actual amount plus a percentage increase?

Transcribed Image Text:

Activity Area Reception.. Treatment Cleaning. Cost Driver Rates $ 60 120 21 Budgeted Amount of Cost Driver Outpatients Admitted Patients 6,500 forms 8,400 forms 8,000 diagnoses 5,400 diagnoses 3,400 people 7,400 people