C3.41 LO 3.6 3.9 3.12 (appendix) Cost estimation: hospital 'I don't understand this cost report at all', exclaimed John Carter, the newly appointed administrator of AngelCare General Hospital. 'Our administrative costs in the new paediatrics clinic are difficult to understand. One month the report shows $16600, and the next month it's $32 200. What's going on?' Carter's question was posed to Alice Baines, the hospital's accountant. 'The main problem is that the clinic has experienced some widely varying patient loads in its first year of operation', Baines replied. 'There seems to be some confusion in the public's mind about what services we offer in the clinic. When do they come to the clinic? When do they go to the outpatients' department? That sort of thing. As the patient load has varied, we've frequently changed our clinic administrative staffing. Also, we have found that the number of emergency procedures varies each month, and emergency procedures cause additional staff costs. Carter continued to puzzle over the report. 'Could you put some data together, Alice, so we can see how this cost behaves over a range of patient loads?' 'You'll have it this afternoon', Baines responded. She set to work right away and gathered the following data:

Month Number of emergency procedures Patient load Administrative cost January 20 2800 $55600 February 22 1000 28000 March 10 800 24000 April 20 2000 40000 May 24 2600 47 600 June 28 1800 36 800 July 16 2200 40 800 August 14 600 16400 September 24 1400 37 600 October 24 2400 44 400 November 16 1200 33 200 December 32 3000 64 400 Baines does not believe that the first year's widely fluctuating patient load will be experienced again in the future. She has estimated that the clinic's relevant range of monthly activity in the future will be 600 to 1200 patients. Required 1. Draw a scatter diagram of the clinic's administrative costs and patient loads during its first year of operations. 2. Mark the clinic's relevant range of activity on the scatter diagram. 3. Use the high-low method to estimate the behaviour of the clinic's administrative costs, based on patient load within the relevant range. Use an equation to express the results of this estimation method. 4. What is your prediction of the clinic's administrative cost during a month when 800 patients visit the hospital? 5. Would you use the cost function from requirement 3 to predict the clinic's administrative cost for 300 patient visits? Explain your answer.

6. Identify the number of emergency procedures, patient load and administrative costs for each month within the relevant range. 7. Construct an Excel spreadsheet and use regression analysis to estimate:

(a) an equation with patient load predicting administrative cost, within the relevant range

(b) the clinic's administrative cost during a month when 800 patients visit the hospital

(c) an equation with both activities-patient load and the number of emergency procedures- predicting administrative cost, within the relevant range

(d) the clinic's administrative cost during a month when 800 patients visit the hospital and there are 12 emergency procedures, using the equation from part (c). 8. Does the inclusion of the additional cost driver of emergency procedures Improve the model? Explain your answer. 9. How confident should Baines be about the three cost models (high-low, simple regression and multiple regression) that she has developed? Explain your answer.