Problem 7-36Activity Costing, Assigning Resource Costs, Primary and Secondary Activities

Trinity Clinic has identified three activities for daily maternity care: occupancy and feeding, nursing, and nursing supervision. The nursing supervisor oversees 150 nurses, 25 of whom are maternity nurses (the other nurses are located in other care areas such as the emergency room and intensive care). The nursing supervisor has three assistants, a secretary, several offices, com- puters, phones, and furniture. The three assistants spend 75 percent of their time on the supervis- ing activity and 25 percent of their time as surgical nurses. They each receive a salary of $48,000. The nursing supervisor has a salary of $70,000. She spends 100 percent of her time supervising. The secretary receives a salary of $22,000 per year. Other costs directly traceable to the supervisory activity (depreciation, utilities, phone, etc.) average $100,000 per year.

Daily care output is measured as ?patient days.? The clinic has traditionally assigned the cost of daily care by using a daily rate (a rate per patient day). Different kinds of daily care are provided, and rates are structured to reflect these differences. For example, a higher daily rate is charged for an intensive care unit than for a maternity care unit. Within units, however, the daily rates are the same for all patients. Under the traditional, functional approach, the daily rate is computed by dividing the annual costs of occupancy and feeding, nursing, and a share of supervision by the unit?s capacity expressed in patient days. The cost of supervision is assigned to each care area based on the number of nurses. A single driver (patient days) is used to assign the costs of daily care to each patient.

A pilot study has revealed that the demands for nursing care vary within the maternity unit, depending on the severity of a patient?s case. Specifically, demand for nursing services per day increases with severity. Assume that the maternity unit has three levels of increasing severity: normal patients, cesarean patients, and patients with complications. The pilot study provided the following activity and cost information:

Activity

Occupancy and feeding Nursing care (maternity) Nursing supervision

Annual Cost ($)

1,000,000 950,000

?

Activity Driver

Patient days Hours of nursing care Number of nurses

Annual Quantity

10,000 50,000 150

The pilot study also revealed the following information concerning the three types of patients and their annual demands:

Required:

Patient Type

Normal Cesarean Complications Total

Patient Days Demanded

7,000 2,000 1,000

10,000

Nursing Hours Demanded

17,500 12,500 20,000

50,000

1.Calculate the cost per patient day by using a functional-based approach. 2.Calculate the cost per patient day by using an activity-based approach.