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CHAPTER 6 Example 6A: Direct and Indirect Costs Review the chapter text regarding direct and indirect costs. In particular, review the example of ambulance direct
CHAPTER 6 Example 6A: Direct and Indirect Costs Review the chapter text regarding direct and indirect costs. In particular, review the example of ambulance direct costs (Exhibit 6-1) and indirect costs (Exhibit 6-2). Remember that indi rect costs are shared and are sometimes called joint costs or common costs. Because such are shared they the operating unit (such as a department) did not costs must be allocated. Also, remember that one test of a direct cost is to ask: "If exist, would this cost not be in existence?" Practice Exercise 6-1: Identifying Direct and Indirect Costs Make a worksheet with two columns: Direct Cost and Indirect Cost. Place each of the fol- lowing items in the appropriate column: " Managed care marketing expense . Real estate taxes Liability insurance * Clinic telephone expense 466 ExAMPLES AND EXERCISES, SUPPLEMENTAL MATERIALS, AND SOLUTIONs Utilities (for the entire facility) . Emergency room medical supplies Assignment Exercise 6-1: Allocating Indirect Costs Study Table 6-1, Table 6-2, and review the chapter text describing how the indirect cost is allocated. This assignment will change the allocation bases input for (A) Number of Visits (Volume), (B) Proportion of Direct Costs, and (C) Number of Computers in Service. Required 1. Compute the costs allocated to cost centers "Clerical Salaries," "Administrative Salaries," and "Computer Services using the new allocation bases shown below. Use worksheet #1 that replicates the set up in Table 6-2. Total the new results. The new allocation bases are: A = # Visits (Volume): PT = 9,600/OT = 4,000/ST = 2,400/Total = 16,000 (16,000 x $3.50- $56,000) B Proportion of Direct Costs: PT 60%/OT 25%/ST 15%/Total : 100% (% $55,000) C = # Computers in Service: PT = 10/OT-3/ST 3/Total = 16 (16 x $5,000 each -$80,000). 2. Using worksheet #2 that replicates the set up in Table 6-1, enter the new direct cost and the new totals for indirect costs resulting from your work. Total the new results
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