Activity-based costing: service organisation

The Intellectually Disabled Council has responsibility for distributing government grants to fund support services for intellectually disabled people. The director is concerned that grants be distributed on an equitable basis, and asks Sue Jolley, the council's management accountant, to estimate the cost of providing institutional care to clients with intellectual disabilities. Jolley decides to use activity-based costing in one of the state's larger institutions, Greenfields, to obtain an initial estimate of the costs of the services provided.

Working with a project team at Greenfields, she identifies the following major activities and costs for next year.

Greenfields activities performed

Activity Cost (in $'000s) Annual volume of activity driver

Cook meals $500 100 000 meals

Transport clients (internal) 200 4 000 hours of assistance

Transport clients (external) 450 6 000 hours of assistance

Clean rooms 100 20 000 rooms cleaned

Bath clients 144 16 000 baths given

Dress clients 30 10 000 clients dressed

Administer medication 120 75 000 doses administered

Provide occupational therapy 90 600 classes

Provide physiotherapy 250 5 000 hrs of physiotherapy

Run workshop 150 200 days of operation

Although the needs of the individual clients vary tremendously, the project team identifies three major service types: high-dependency support, low-dependency support and outpatient support. High-dependency and low-dependency clients live at Greenfields, while outpatients attend the centre on a daily basis. The average number of activities required to support each of the three types of clients each day is estimated as follows

Greenfields activities consumed per client per day

Activity High-dependencyLow-dependency Outpatient

Cook meals 3 3 1

Internal transport 4 0 0

External transport 3 2 1

Clean room 2 1 0

Bath client 1 0 0

Dress client 10 0

Administer medication 4 1 1

Provide occup therapy* 1 2 2

Provide physiotherapy 4 2 1

Run workshop 0 1 1

* Occupational therapy classes are attended by an average of 10 clients.

The workshop is used by an average of 20 clients per day

Required:

1. Construct an Excel spreadsheet to:

(a) calculate the cost per unit of activity driver for each of the activities identified by the project team

(b) calculate the daily cost of supporting: (i) a high-dependency client (ii) a low-dependency client (iii) an outpatient.

2. Review the list of activities and suggest some major activities that may have been overlooked by the project team.

3. Do you think activity-based costing is useful in this situation? Explain your answer