Rodrigo Velilla is a young consultant that has recently been promoted to partner, after ten years of hard work in his firm. Together with higher pay, his new position means that he will have to start doing some marketing and he will play some role in the management of the firm. Rodrigo has chosen to develop the Social Corporate Responsibility area of the firm. As his first task at it, he has called Marta Jimnez and old colleague of his at business school. While he worked in consultancy, she has devoted all these years to manage Santa Teresa, a non-for-profit started by nuns almost 100 years ago. Only recently, she has been named general manager. Marta thinks she could use some pro-bono work Rodrigos firm will be offering, since their culture is that every cent is spent in social work, none spent in admin, which for her means she does not have any money to hire professional management services. Santa Teresa Health Center is located in South Europe and provides help and treatment for alcoholism and drug addiction. Helping minors and young unemployed adults is a special priority, as it is working with adults in different industries of the region, mostly related to tourism (including accommodation and food services, construction, arts and entertainment). Employee heavy alcohol use or use of illicit drugs are associated with negative work behaviors such as absenteeism and frequent job changes. In extreme cases and in many cases of drug addiction, many hours of work are lost, medical and psychological help for families is needed, even crime must be accounted for as a negative externality, all of which can be minimized by rehab and treatment.

The health center runs two recovery inpatient rehab programs: alcoholism and drug addict rehabilitation. They also provide outpatient services of aftercare (counseling and patients care for mild abusers or after being released from a hospital or clinic). Inpatient assistance includes 24-hour medical care, emotional support and freedom from outside triggers. The length of treatment depends mainly on the severity of the addiction. The clinic management believes that treatments and rehabilitations work best when carried out in a controlled environment supervised by medical staff or experienced specialists: Alcoholism is a delicate issue that must be addressed as discovered otherwise it can cause permanent damage in terms of relationships and productivity at work. Non-judgmental specialists can guide patients through the detox process, intervention, and rehabilitation processes. Drug addiction is also a delicate and complex issue wherein the person involved becomes reliant on drug substances and cannot control its excessive reliance without withdrawal symptoms. Drug detox allows the gradual expulsion of drug toxins from the internal organs of an addict. Outpatient aftercare offers to individuals released from a clinic or with a mild substance abuse, treatment sessions that can be scheduled during various times throughout the week. The treatment provides medication, counselling and a network of support, while allowing the freedom to continue working and caring for family while in recovery. Rehabilitation is the cornerstone of long-term recovery in most drug addiction cases. This treatment regimen can include, group work, mental therapy, relapse prevention, and general education on addiction. The clinic has 50 places for alcohol rehab, 80 for drug abuse rehab and 120 places for day-patient in aftercare. In average an alcohol patient stays six months, a drug rehab patient, one year, and an aftercare treatment typically lasts 9 months. The clinic runs its own laboratory for tests. THE COSTS Labor costs represent the largest segment of each program costs. These costs include the cost of services provided directly to the patient. Direct service personnel are physicians, psychologists, nurses, and social workers who spend the majority of their time working directly with patients. Other costs of treatment resources that are not used directly to treat individual patients but are necessary to run the program are recorded in a simple indirect services category to be allocated to each program. These costs include indirect service personnel typically are managers, maintenance workers, security and others who do not usually work directly with patients and indirect service activities, such as doing paperwork, attending meetings, or participating in training workshops. In sum, the treatment programs need to cover several costs: Treatment personnel (such as physicians, psychologists, nurses, physicians, social workers, and counsellors) Medical supplies Administrators and office personnel (including managers, human resources, and payroll) Space, furniture and equipment Maintenance and utilities (including telephone, e-mail, and Internet services) Laboratory services (including drug tests) Other indirect costs such as transportation, accounting, security, insurance (including professional liability)

The centers budget for next year follows: Professional salaries*: 6 physicians x 150,000 20 psychologists x 75,000 24 nurses x 40,000 Total direct costs Medical supplies Rent, utilities and clinic maintenance Administrative costs to manage patient charts, food, laundry Laboratory services Other costs (including transportation and other administrative clinic expenses) Total indirect costs Total 900,000 1,500,000 960,000 3,360,000 375,000 187,500 525,000 78,000 136,000 1,301,500 4,661,500 * These costs include professional service paid. However, it is important to note that the clinic also includes a significant amount of volunteer work of social workers that provide nursing and social work activities. At first, it was difficult to estimate the cost of each service, since most professionals spend time working for all the three services. Marta solved the issue by computing the total hours worked by professionals of each category for each of the services: Monthly hours worked Alcoholism Drug Aftercare Total employee hours per week Physicians Psychologists Nurses 30 180 120 120 120 240 30 300 360 180 600 720 The budgeted costs for each program are the following: Year budget Alcoholism Drug Aftercare Total Direct costs Physicians Psychologists Nurses Total direct costs Indirect costs* Total costs Full cost per place per year 150,000 450,000 160,000 760,000 260,300 1,020,300 20,406 600,000 300,000 320,000 1,220,000 416,480 1,636,480 20,456 150,000 750,000 480,000 1,380,000 624,720 2,004,720 16,706 900,000 1,500,000 960,000 3,360,000 1,301,500 4,661,500 * Rate to allocate indirect costs = 1,301,500 / 250 available places = 5,206 per places Marta has recently become aware of activity-based costing as a method to refine costing systems. She is not sure about the outcome of the new analysis, but she wants to discuss it with Rodrigo on the base of reliable numbers. Marta asked her accountant to prepare some information about the different activities performed at the clinic. This is the budgeted information obtained for next year:

Space occupied by each program Available places* Number of laboratory tests 3,500 m2 50 900 5,500 m2 80 1,400 6,000 m2 120 700 15,000 m2 250 3,000 * The number of places available is 50 for alcoholism patients, 80 for drug abuse patients and 120 for after care patients. Since occupation is 100%, the number of patient-years of service rendered matches full capacity, that is 250. REVENUES AND DEMAND The in-take of patients is limited by the size of the premises. The centers sole recurrent source of revenues is the public price paid by the regional government for the treatment of each patient. Santa Teresa rises some additional money from private donors, business community, and the regions most prominent savings bank. However, since these cannot be anticipated, they are not budgeted, and only when they are collected, they are invested in improvements to the facilities and new equipment. Alcoholism Drug Aftercare Full treatment price per patient 9,200 23,500 11,500

Can you help Marta produce an ABC costing approach that could help her discuss with Rodrigo the profitability of each line of work? What would be the cost pools, what could be the drivers and the rates?