Problem 4.32 - ABC, Resource Drivers, Service Industry

Glencoe Medical Clinic operates a cardiology care unit and a maternity care unit. Colby Hepworth, the clinic's administrator, is investigating the charges assigned to cardiology patients. Currently, all cardiology patients are charged the same rate per patient day for daily care services. Daily care services are broadly defined as occupancy, feeding, and nursing care. A recent study, however, revealed several interesting outcomes. First, the demands patients place on daily care services vary with the severity of the case being treated. Second, the occupancy activity is acombination of two activities: lodging and use of monitoring equipment. Since some patients require more monitoring than others, these activities should be separated. Third, the daily rate should reflect the difference in demands resulting from differences in patient type. Separating the occupancy activity into two separate activities also required the determination of the cost of each activity. Determining the costs of the monitoring activity was fairly easy because its costs were directly traceable. Lodging costs, however, are shared by two activities: lodging cardiology patients and lodging maternity care patients. The total lodging costs for the two activities were $5,700,000 per year and consisted of such items as building depreciation, building maintenance, and building utilities. The cardiology floor and the maternity floor each occupy 20,000 square feet. Hepworth determined that lodging costs would be assigned to each unit based on square feet.

To compute a daily rate that reflected the difference in demands, patients were placed in three categories according to illness severity, and the following annual data were collected:

Activity

Cost of Activity

Activity Driver

Quantity

Lodging

$ 2,850,000

Patient days

22,500

Monitoring

$ 2,100,000

Monitoring hours used

30,000

Feeding

$ 450,000

Patient days

22,500

Nursing care

$ 4,500,000

Nursing hours

225,000

Total

$ 9,900,000

The demands associated with patient severity are also provided:

Severity

Patient Days

Monitoring Hours

Nursing Hours

High

7,500

15,000

135,000

Medium

11,250

12,000

75,000

Low

3,750

3,000

15,000

Required:

1. Suppose that the costs of daily care are assigned using only patient days as the activity driver (which is also the measure of output). Compute the daily rate using this unit-based approach of cost assignment.

2. Compute activity rates using the given activity drivers (combine activities with the same driver).

3. Compute the charge per patient day for each patient type using the activity rates from Requirement 2 and the demands on each activity.

4. Suppose that the product is defined as stay and treatment where the treatment is bypass surgery. What additional information would you need to cost out this newly defined product?