Question
Jaden Kyler is the Chief Operating Officer at United Hospital in Newark New Jersey. He is analyzing thehospital's overhead costs but is not sure whether
Jaden Kyler is the Chief Operating Officer at United Hospital in Newark New Jersey. He is analyzing thehospital's overhead costs but is not sure whether nursing hours or the number of patient days would be the best cost driver to use for predicting the hospital's overhead.
He has gathered the following information for the last six months of the most recent year:
Data Table:
Hospital | Nursing | Number of | Overhead Cost | Overhead Cost | |
Month | Overhead Costs | Hours | Patient Days | per Nursing Hour | per Patient Day |
July. . . . . . . | $479,000 | 23,000 | 3,640 | $20.83 | $131.59 |
August. . . . | $528,000 | 25,500 | 4,300 | $20.71 | $122.79 |
September. | $416,000 | 20,500 | 4,260 | $20.29 | $97.65 |
October. . . . | $453,000 | 22,000 | 3,490 | $20.59 | $129.80 |
November. . | $559,000 | 30,500 | 5,730 | $18.33 | $97.56 |
December. | $435,000 | 21,000 | 3,280 | $20.71 | $132.62 |
Requirements:
1. Are the hospital's overhead costs fixed, variable, ormixed? Explain.
The hospital's overhead costs appear to be a ▼(fixed, mixed, variable cost). If it were a ▼ (fixed, mixed, variable cost), it would remain constant in total each month. If it were a ▼ (fixed, mixed, variable cost), it would remain constant on a per unit (of activity) basis. Both of the hospital's overhead cost per nursing hour and overhead cost per patient day ▼ (are fixed, vary) with volume.
2. Graph the hospital's overhead costs against nursing hours.
3. Graph the hospital's overhead costs against the number of patient days.
4. Do the data appear to be sound or do you see any potential data problems? Explain.
5. Use the high-low method to determine the hospital's cost equation using nursing hours as the cost driver. Predict total overhead costs if 24,500 nursing hours are predicted for the month.
6. Kyler runs a regression analysis using nursing hours as the cost driver to predict total hospital overhead costs. The Excel output from the regression analysis is as follows:
Regression analysis using nursing hours
SUMMARY OUTPUT - Nursing hours as a cost driver
Regression Statistics | ||
Multiple R | 0.958335 | |
R Square | 0.918405 | |
Adjusted R Square | 0.898007 | |
Standard Error | 17,712.08289 | |
Observations | 6 |
ANOVA | |||||
df | SS | MS | F | Significance F | |
Regression | 1 | 14,124,461,812 | 14,124,461,812 | 45.022814 | 0.002568 |
Residual | 4 | 1,254,871,522 | 313,717,880 | ||
Total | 5 | 15,379,333,334 |
Standard | Lower | Upper | ||||
Coefficients | Error | t Stat | P-value | 95% | 95% | |
Intercept | 141,867.97 | 50,663.259 | 2.8 | 0.049 | 1,204.213 | 282,531.726 |
X Variable 1 | 14.17 | 2.111 | 6.71 | 0.000 | 8.305 | 20.029 |
If 24,500 nursing hours are predicted for the month, what is the total predicted hospitaloverhead?
7. Kyler then ran the regression analysis using a number of patient days as the cost driver. The Excel output from the regression is shown here:
Regression analysis using a number of patient days
SUMMARY OUTPUT - Using a number of patient days as a cost driver
Regression Statistics | ||
Multiple R | 0.736429 | |
R Square | 0.542327 | |
Adjusted R Square | 0.427909 | |
Standard Error | 41,948.4953 | |
Observations | 6 |
ANOVA | |||||
df | SS | MS | F | Significance F | |
Regression | 1 | 8,340,628,301 | 8,340,628,301 | 4.739865 | 0.09505 |
Residual | 4 | 7,038,705,032 | 1,759,676,258 | ||
Total | 5 | 15,379,333,333 |
Standard | Lower | Upper | ||||
Coefficients | Error | t Stat | P-value | 95% | 95% | |
Intercept | 289,807.47 | 88,271.2 | 3.283 | 0.03 | 44,727.331 | 534,887.615 |
X Variable 1 | 45.8 | 21.035 | 2.177 | 0.095 | -12.607 | 104.198 |
If 3,650 patient days are predicted for the month, what is the total predicted hospitaloverhead?
8. Which regression analysis (using nursing hours or using a number of patient days as the cost driver) produces the best cost equation? Explain your answer.
Step by Step Solution
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