Exercise 1 Department and activity-cost rates service sector. Raynham's Radiology Center (RRC) performs X-rays, ultrasounds, computer tomography (CT) scans, and magnetic resonance imaging (MRI). RRC has developed a reputation as a top radiology center in the state. RRC has achieved this status because it constantly reexamines its processes and procedures. RRC has been using a single, facility-wide overhead allocation rate. The vice president of finance believes that RRC can make better process improvements if it uses more disaggregated cost information. She says, We have state-of-the-art medical imaging technology. Can't we have state-of-the-art accounting technology?" Raynham's Radiology Center Budgeted Information for the Year Ended May 31, 2014 X-rays Ultrasound CT Scan MRI Total Technician labor S 62,000 S101,000 $155,000 S 103,000 $ 421,000 42.240 Depreciation 256,000 424,960 876,800 1,600,000 Materials 22.600 16,400 23,600 31,500 94,100 Administration 20,000 Maintenance 250,000 Sanitation 252,500 Utilities 151,100 S126,840 $373,400 $603,560 $1,011,300 S2.788,700 Number of procedures 3,842 4,352 2,924 2,482 Minutes to clean after each procedure 5 5 15 35 Minutes for each procedure 5 15 25 40 RRC operates at capacity. The proposed allocation bases for overhead are: Administration Maintenance (including parts) Number of procedures Capital cost of the equipment (use Depreciation) Total cleaning ininutes Total procedure minutes Sanitation Utilities Required: 1. Calculate the budgeted cost per service for X-rays, ultrasounds, CT scans, and MRI using direct technician labor costs as the allocation basis. 2. Calculate the budgeted cost per service of X-rays, ultrasounds, CT scans, and MRI if RRC allocated overhead costs using activity-based costing. 3. Explain how the disaggregation of information could be helpful to RRC's intention to continuously improve its services. 1. BUDGETED MOH BMOHR MOH ALLOCATED TO 1. X-rays 2. ULTRASOUND 3. CT SCAN 4. MRI MRI Total Ultrasound CT scan X-rays $ 62,000 42,240 22,600 Technician labor Depreciation Materials Allocated overhead* Total budgeted costs Budgeted number of procedures Budgeted cost per service + 3.842 +4.352 +2.924 + 2.482 MRI Total 2. Budgeted Information ( TOTAL QUANTITIES OF THE BASE) X-rays Ultrasound CT scan Number of procedures Cleaning minutes per procedure X5 Total cleaning minutes 19.210 3,842 Number of procedures Minutes for each procedure Total procedure minutes 3,842 X5 19.210 65,280 73.100 99,280 256,870 Units of Cost Driver Activity Rate (4) =(1) + (3) $1.47059 per procedure 13,600 Activity Budgeted Cost Cost Driver (1) (2) Administration S 20.000 Total number of procedures Maintenance Total dollars of depreciation Sanitation Total cleaning minutes Utilities Total procedure minutes 2 Ultrasound CT Scan MRI Total Technician labor Depreciation Materials Allocated activity costs: Administration X-rays $ 62,000 42,240 22,600 Maintenance Sanitation Utilities $490,200 $781,760 $1,338,100 $2.788,700 Total budgeted cost Budgeted number of procedures Budgeted cost per service $178,640 + 3,842 $ 46.50 3. Using the disaggregated activity-based costing data, managers can see that the MRI actually costs substantially more and x-rays, ultrasounds, and CT scans substantially less than the traditional system indicated. In particular, the MRI activity generates a lot of maintenance activity and sanitation activity. Managers should examine the use of these two activities to search for ways to reduce the activity consumption and ultimately its cost