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    pmonica Posts: 34, Reputation: 1
    Junior Member

    Jul 23, 2008, 10:51 PM
    Functional-based and activity based costing
    My assignment for this week is way above my head, the textbook is not of much help and I need some guidance as I go along. Below is the assignment.
    I hope you can help me.


    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 others are located in other care areas such as the emergency room and intensive care). The nursing supervisor has three assistants, a secretary, several offices, computers, phones, and furniture. The three assistants spend 75% of their time on the supervising activity and 25% of their time on surgical nurses. They each receive a salary of $48,000. The nursing supervisor has a salary of $70,000. She spends 100% 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). There are actually different kinds of daily care, and rates are structured to reflect these differences. For example, a higher daily rate is charged for an intensive care unit than for 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 cost 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 the patient’s case. Specifically, demand for nursing services per day increases with severity. Assume that within the maternity unit are three levels of increasing severity: normal patients, cesarean patients, and patients with complications. The pilot study provided the following activity and cost information:
    Activity Annual Cost Activity Driver Annual Quantity
    Occupancy and feeding $1,000,000 Patient days 10,000
    Nursing care (maternity) 950,000 Hours of nursing care 50,000
    Nursing Supervision ? Number of nurses 150

    The pilot study also revealed the following information concerning the three types of patients and their annual demands.
    Patient Days Nursing Hours
    Patient Type Demanded Demanded
    Normal 7,000 17,500
    Cesarean 2,000 12,500
    Complications 1,000 20,000
    Total 10,000 50,000
    1. Calculate the cost per patient day using a functional-based approach.
    2. Calculate the cost per patient day using an activity-based approach.
    3. The hospital processes 1,000,000 pounds of laundry per year. The cost of the laundering activity is $500,000 per year. In a functional-based costing system, the cost of the Laundry department is assigned to each user department in proportion to the pounds of laundry produced. Typically, maternity produces 200,000 pounds per year. How would this change the cost per patient day calculated in Requirement 1? Now describe what information you would need to modify the calculation made in Requirement 2.
    4. Under what conditions would this activity calculation provide a more accurate cost assignment?
    5. Calculate the cost per unit for each product using number of units manufactured to assign all overhead costs.
    6. Suppose there are 3 companies one using direct labor hours as the driver, second using number of units as the driver and the third using the activity based costing approach. If there is an intense price war in the market place among the three companies and they compete purely on price, determine the market share obtained by the three companies for each of the products.
    pmonica's Avatar
    pmonica Posts: 34, Reputation: 1
    Junior Member

    Jul 23, 2008, 11:35 PM
    How do I calculate the cost per patient day using a functional based approach?
    pmonica's Avatar
    pmonica Posts: 34, Reputation: 1
    Junior Member

    Jul 24, 2008, 02:17 PM
    Does knowing the predetermined rate help me in anyway?

    Predetermined activity rate = budgeted activity cost of the period/
    Budgeted level of activity cost in the period
    Predetermined activity rate = $1,000,000/10,000 = $100

    I know that per unit cost is compted by adding the total prime costs for a product to its assigned overhead costs and then dividing this total cost by the units produced. How do I apply this to my question?
    pmonica's Avatar
    pmonica Posts: 34, Reputation: 1
    Junior Member

    Jul 24, 2008, 02:52 PM
    Annual cost for nursing supervision is calculated as follows
    Three assistants receive $48,000 each = 48,000*3 = $144,000
    Add: Nursing supervisor salary = $70,000
    Total = $214,000
    Add Secretary salary = $22,000
    Add other costs = $100,000
    Total annual cost for nursing supervision = $336,000

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