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Time Driven

- Glencoe Medical Clinic operates cardiology and maternity units and charges cardiology patients the same daily rate for care services like lodging, feeding, and nursing. - A study found that patient demands and costs vary based on illness severity. It also found occupancy costs should separate lodging and monitoring equipment usage. - The clinic administrator is investigating how to set daily rates that reflect differences in patient types and demands on services. Total annual lodging costs for the units are $5.7M and will be assigned based on square footage.

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158 views2 pages

Time Driven

- Glencoe Medical Clinic operates cardiology and maternity units and charges cardiology patients the same daily rate for care services like lodging, feeding, and nursing. - A study found that patient demands and costs vary based on illness severity. It also found occupancy costs should separate lodging and monitoring equipment usage. - The clinic administrator is investigating how to set daily rates that reflect differences in patient types and demands on services. Total annual lodging costs for the units are $5.7M and will be assigned based on square footage.

Uploaded by

wella
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Problem 4.

32
ABC, Resource Drivers, Service Industry
Objective 2, 3
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 a combination 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:
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?
5. Comment on the value of activity-based costing in service industries.

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