4.9 Product Costing and Decision Analysis for a Service Company

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 x 6 days

Patient days 1,680

Weighted care units 19,200

Procedure B

Number of patients 650

Average length of stay x 5 days

Patient days 3,250

Weighted care units 6,000

Procedure C

Number of patients 1,200

Average length of stay x 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

Product Costing and Decision Analysis for a Service Company 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 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 x 6 days 1,680 19,200 650 Patient days Weighted care units Procedure Number of patients Average length of stay Patient days Weighted care units Procedure C Number of patients 5 days 3,250 6,000 1,200 1,200 Procedure C Number of patients Average length of stay Patient days Weighted care units * 4 days 4,800 24,000 Private insurance reimburses the hospital for these activities at a fixed daily rate of $406 per patient day for all three procedures. Required: 1. Determine the activity rates. Activity Activity Rate Scheduling and admitting $ per patient Housekeeping per pd Nursing per wcu 2. Determine the activity cost for each procedure. Total Activity Activity Cost by Procedure Procedure A Procedure B Procedure C 3. Determine the excess or deficiency of reimbursements to activity cost. Excess (deficiency) of reimbursement over Activity activity cost Procedure A Procedure B Procedure C Excess (deficiency) of reimbursement over Activity activity cost Procedure A Procedure Procedure 4. Based on the determination of the excess or deficiency of reimbursement to activity cost, indicate which procedure cost is too high. Procedure Hospital management has decided to further investigate the nursing effort Determine the weighted care units per patient days for each procedure. Round to one decimal place. Procedure weighted care units per patient day Procedure B weighted care units per patient day Procedure weighted care units per patient day