Product Costing and Decision Analysis for a Service Company

Pleasant Stay Medical Inc. wishes to determine its product costs. Pleasant Stay offers a variety of medical procedures (operations) that are considered its products. The overhead has been separated into three major activities. The annual estimated activity costs and activity bases follow:

Activity	Budgeted Activity Cost	Activity Base
Scheduling and admitting	$432,000	Number of patients
Housekeeping	4,212,000	Number of patient days
Nursing	5,376,000	Weighted care unit
Total costs	$10,020,000

Total patient days are determined by multiplying the number of patients by the average length of stay in the hospital. A weighted care unit (wcu) is a measure of nursing effort used to care for patients. There were 192,000 weighted care units estimated for the year. In addition, Pleasant Stay estimated 6,000 patients and 27,000 patient days for the year. (The average patient is expected to have a a little more than a four-day stay in the hospital.)

During a portion of the year, Pleasant Stay collected patient information for three selected procedures, as follows:

	Activity-Base Usage
Procedure A
Number of patients	280
Average length of stay	x 6	days
Patient days	1,680
Weighted care units	19,200
Procedure B
Number of patients	650
Average length of stay	x 5	days
Patient days	3,250
Weighted care units	6,000
Procedure C
Number of patients	1,200
Average length of stay	x 4	days
Patient days	4,800
Weighted care units	24,000

Private insurance reimburses the hospital for these activities at a fixed daily rate of $406 per patient day for all three procedures.

Required:

1. Determine the activity rates.

Activity	Activity Rate
Scheduling and admitting	$	per patient
Housekeeping	$	per pd
Nursing	$	per wcu

2. Determine the activity cost for each procedure.

Activity	Total Activity Cost by Procedure
Procedure A	$
Procedure B	$
Procedure C	$

3. Determine the excess or deficiency of reimbursements to activity cost.

Activity	Excess (deficiency) of reimbursement over activity cost
Procedure A	$
Procedure B	$
Procedure C	$

4. Based on the determination of the excess or deficiency of reimbursement to activity cost, indicate which procedure cost is too high.

Hospital management has decided to further investigate the nursing effort. Determine the weighted care units per patient days for each procedure. Round to one decimal place.

Procedure A weighted care units per patient day

Procedure B weighted care units per patient day

Procedure C weighted care units per patient day

Analyze Life Force Fitness, Inc.

Life Force Fitness, Inc., assembles and sells treadmills. Activity-based product information for each treadmill is as follows:

Activity	Activity-Base Usage (hrs. per unit)	X	Activity Rate per Hour	=	Activity Cost
Motor assembly	1.50		$20		$30.00
Final assembly	1.00		18		18.00
Testing	0.25		22		5.50
Rework	0.40		22		8.80
Moving	0.20		15		3.00
Activity cost per unit					$65.30

All of the activity costs are related to labor. Management must remove $2.00 of activity cost from the product in order to remain competitive.

Rework involves disassembling and repairing a unit that fails testing. Not all units require rework, but the average is 0.40 hours per unit. Presently, the testing is done on the completed assembly; but much of the rework has been related to motors, which can be tested independently prior to adding the motor to the treadmill during final assembly. Thus, motor issues can be diagnosed and solved without having to disassemble the complete treadmill. This change will reduce the average rework per unit by one-quarter.

a. Determine the new activity cost per unit under the rework improvement scenario. Round your answer to 2 decimal place.

Activity cost per unit $