P6.39 LO 6.7 6.8 Service costing; department cost allocation: hospital Allied Care is a private hospital in country Victoria. The hospital is a not-for-profit organisation and currently bills its patients at $375 per day. This rate was set at the beginning of the year to cover the costs of running the hospital, based on the expected level of activity. The costs at this activity level have been estimated at: Medical staff $3750000 5000000 Nursing staff Overhead: Patient records 625000 Radiology 1000000 Kitchen 1500000 Other overhead 1250000 The expected level of activity in the hospital is measured in patient-days, and was estimated as follows: Patient-days Number of patients Surgical ward 10000 1000 Maternity ward General ward 7000 15000 1.000 2500 It is expected that the medical and nursing staff will work 100000 hours and 250000 hours, respectively, during the year, and that their time will be spent as follows: Surgical ward Maternity ward General ward Total staff hours Medical staff hours Nursing staff hours 50000 120000 10000 10000 40000 100000 120000 250000 The billing system had been well accepted within the local community. However, one day, on being discharged from the maternity ward, a patient lodged a complaint over the fee. She claimed that as a maternity patient she should have been charged less than a surgical patient, as she required less care from both the medical and nursing staff. Also, unlike surgical patients, maternity patients rarely require radiology support or special meals from the kitchen. A subsequent review of the medical, nursing and support services required by patients in the maternity and surgical wards substantiated her claims.

Required 1. Construct an Excel spreadsheet to:

(a) show how the billing rate of $375 per patient-day was set

(b) estimate separate billing rates for each of the three wards, assuming that medical and nursing staff costs are allocated to the three wards using staff hours, and all other overhead costs are allocated using patient-days as the cost driver. 2. When the departmental billing rates are discussed at the next board meeting, the treasurer opposes them, claiming that they do not address all of the issues raised by the maternity patient. Do you agree? What is the problem? 3. Assume that the review indicates the following cost drivers should be used to allocate overhead costs to each ward: Overhead cost Patient records Radiology Kitchen Other overhead Cost driver The number of patients Medical staff hours spent in the surgical and general wards Nursing staff hours Nursing staff hours Now use your Excel spreadsheet to estimate the billing rates for the surgical, maternity and general wards. 4. Which approach would you recommend? Explain your answer. 5. Can you suggest further improvements to Allied Care's costing/billing system?