sreeadat
Mar 8, 2012, 10:58 AM
2) Currently the Hospital allocates hospital administrative expenses to units using each unit's total revenues and space costs to units using the square footage that each unit occupies. For administrative costs, this means that the more revenues a unit makes, the more it pays in overhead charges. For space costs, this means that the more space the unit takes up, the more space costs it pays.
Suggest a better method for allocating each overhead cost based on the data in the case and explain why you think it would be a better method. If you believe the current method for either cost is the best method based on the information in the case, state why you believe it is the best method. I am looking for a conceptual suggestion and do not expect specific numbers since you really don't have enough detail in the case to produce a specific numerical example. Your suggestion should be clear about what basis you would use to allocate the overhead and how it would be calculated, just without specific numbers. That is, for each major cost (supervision, record keeping, and space costs) what allocation basis would you use and why? In addition, your answer should consider any new data that you would need to gather that might not be part of the Hospitals regular reporting system.
3) Without considering any improvements to the process you include in your answer to question 4, Riverview used to develop their DCFA and using the data from the case, should Riverview discontinue the Dialysis Unit? Why or Why not? I am looking for a thorough analysis based all the relevant information from the case to support your decision.
4) Review the Expansion Decision and DCFA information in the Riverview case and suggest three ways that the Hospital could improve the CFO's analysis of the expansion decision. Focus on how the CFO structured the analysis and any errors or omissions you feel he might have made. Be sure to explain how your suggestion would improve his analysis.
The remaining questions are not based on the Riverview case but are generic to management accounting principles and practices.
5) Unit cost determination involves inherent tradeoffs between accuracy and completeness. As the accounting moves from direct unit costs to full unit costs, the costs become more complete, but less accurate. Activity-based costing helped reduce this tradeoff, but not eliminate it. Write a short analysis that discusses the inherent tradeoff between accuracy and completeness raised by moving from direct unit costing to full unit costing and discuss how activity-based costing has reduced the extent of this tradeoff, but not eliminated it.
6) One quantitative decision criteria for making capital budget decisions that firms use is called a payback period. A payback period is the number of years that the differential cash flows from a new investment will take to repay the investment. For example, an investment that costs $100,000 and generates $25,000 per year in differential, after-tax, cash flows has a payback period of four years ($100,000 / $25,000 = 4). Explain why the DCFA technique covered in class provides a more accurate economic picture of a capital budgeting project's benefits.
7) In class, we discussed several issues of doing a forecast. To a degree, forecasting is required for both cost modeling and discount cash flow analysis. Given the following scenario, identify two issue that cause you concern about the accuracy of the forecast that was developed from the list we discussed in class.
Jake is the treasurer for a small non-profit that is applying for grant funds to build a community water system. Like most of the organizations Board members, his well has gone dry and he is having to have water trucked in, at a high costs, to continue living in his home. In addition, because there dozens of home in his immediate neighborhood whose wells have gone dry, real estate appraiser will no longer appraise homes in the area because of the uncertainly in being able to sell homes that do not have a reliable water supply. The grant applications all require cash flow projections to show that developing a water system would be economically viable. One key statistic that potential funding agencies look for is the number of expected users since a water system has a substantial fixed cost component and funding agencies want to insure that enough people will hook up to the system to spread the fixed costs over enough members to keep the cost manageable for water users.
Currently the organization charges a minimal joining fee of $25 and does not charge any other on-going fees of members. As they receive grants and loans, the charges to members will need to increase to cover capital replacement costs and loan repayment costs (i.e. capital costs). The organization is in the early stages of development for the water system. They were fortunate enough to get a grant to develop an engineering report that describes the feasibility of the project and the ultimate costs. However, how much members will eventually have to pay to hook up to the system is uncertain because various funding agencies have different formulas for splitting the cost between grants (which don't have to be paid back) and loans (which do). Obviously, the larger proportion of the project that is pay for with grants, the cheaper it will be to hook up.
This creates a real dilemma for Jake in that an application will look more economically viable if his estimates of future membership headcounts are higher because the higher the number of members, the lower cost per member. However, some members will have to pay capital costs for a couple of years before the system can be extended to their properties. As these capital costs become clearer, current members may drop out because they can't afford to pay for the capital costs. The organization cannot prevent members from dropping out at any time. In addition, when a member hooks up to the system, they will need to start paying additional operating costs per gallon of water used. While these operating costs are easier to project than the capital costs, there is still some uncertainty in the amount the organization will need to charge because the operating costs also have a substantial fixed component and, therefore, the actually costs won't be known until the system is operational and the number of members who hook up is known with greater certainty
When Jake developed his cash flow forecasts for a recent grant/loan application, he started with the current membership count and estimated that the number of members would increase by 10 per year for the next five years. He got the rate of 10 new members per year based on the number of new members that the organization signed up in the last year. He did build in estimated fee increases over the next five years to cover new fees that would have to be charged to cover capital and operating costs and also estimated the proportion of members that would be paying just capital costs versus those that would be able to hook up to the system and would also be paying operating costs.
There are 200 households in the anticipated service area for the water system, about 60 of which are now without water. The organization currently has 45 members. The number of homes that are losing water has been about five per year over the last three years. There are groups of households whose wells are not dropping or dropping very slowly. Some of the owners in the systems anticipated service area have already invested thousands of dollars in water capture systems that collect, purify, and store rainwater.
Identify three forecasting issues that you feel this scenario illustrates and that may make the forecast of future cash flows for revenues and explain why you think they may be a threat to the accuracy of Jake's forecast.
Suggest a better method for allocating each overhead cost based on the data in the case and explain why you think it would be a better method. If you believe the current method for either cost is the best method based on the information in the case, state why you believe it is the best method. I am looking for a conceptual suggestion and do not expect specific numbers since you really don't have enough detail in the case to produce a specific numerical example. Your suggestion should be clear about what basis you would use to allocate the overhead and how it would be calculated, just without specific numbers. That is, for each major cost (supervision, record keeping, and space costs) what allocation basis would you use and why? In addition, your answer should consider any new data that you would need to gather that might not be part of the Hospitals regular reporting system.
3) Without considering any improvements to the process you include in your answer to question 4, Riverview used to develop their DCFA and using the data from the case, should Riverview discontinue the Dialysis Unit? Why or Why not? I am looking for a thorough analysis based all the relevant information from the case to support your decision.
4) Review the Expansion Decision and DCFA information in the Riverview case and suggest three ways that the Hospital could improve the CFO's analysis of the expansion decision. Focus on how the CFO structured the analysis and any errors or omissions you feel he might have made. Be sure to explain how your suggestion would improve his analysis.
The remaining questions are not based on the Riverview case but are generic to management accounting principles and practices.
5) Unit cost determination involves inherent tradeoffs between accuracy and completeness. As the accounting moves from direct unit costs to full unit costs, the costs become more complete, but less accurate. Activity-based costing helped reduce this tradeoff, but not eliminate it. Write a short analysis that discusses the inherent tradeoff between accuracy and completeness raised by moving from direct unit costing to full unit costing and discuss how activity-based costing has reduced the extent of this tradeoff, but not eliminated it.
6) One quantitative decision criteria for making capital budget decisions that firms use is called a payback period. A payback period is the number of years that the differential cash flows from a new investment will take to repay the investment. For example, an investment that costs $100,000 and generates $25,000 per year in differential, after-tax, cash flows has a payback period of four years ($100,000 / $25,000 = 4). Explain why the DCFA technique covered in class provides a more accurate economic picture of a capital budgeting project's benefits.
7) In class, we discussed several issues of doing a forecast. To a degree, forecasting is required for both cost modeling and discount cash flow analysis. Given the following scenario, identify two issue that cause you concern about the accuracy of the forecast that was developed from the list we discussed in class.
Jake is the treasurer for a small non-profit that is applying for grant funds to build a community water system. Like most of the organizations Board members, his well has gone dry and he is having to have water trucked in, at a high costs, to continue living in his home. In addition, because there dozens of home in his immediate neighborhood whose wells have gone dry, real estate appraiser will no longer appraise homes in the area because of the uncertainly in being able to sell homes that do not have a reliable water supply. The grant applications all require cash flow projections to show that developing a water system would be economically viable. One key statistic that potential funding agencies look for is the number of expected users since a water system has a substantial fixed cost component and funding agencies want to insure that enough people will hook up to the system to spread the fixed costs over enough members to keep the cost manageable for water users.
Currently the organization charges a minimal joining fee of $25 and does not charge any other on-going fees of members. As they receive grants and loans, the charges to members will need to increase to cover capital replacement costs and loan repayment costs (i.e. capital costs). The organization is in the early stages of development for the water system. They were fortunate enough to get a grant to develop an engineering report that describes the feasibility of the project and the ultimate costs. However, how much members will eventually have to pay to hook up to the system is uncertain because various funding agencies have different formulas for splitting the cost between grants (which don't have to be paid back) and loans (which do). Obviously, the larger proportion of the project that is pay for with grants, the cheaper it will be to hook up.
This creates a real dilemma for Jake in that an application will look more economically viable if his estimates of future membership headcounts are higher because the higher the number of members, the lower cost per member. However, some members will have to pay capital costs for a couple of years before the system can be extended to their properties. As these capital costs become clearer, current members may drop out because they can't afford to pay for the capital costs. The organization cannot prevent members from dropping out at any time. In addition, when a member hooks up to the system, they will need to start paying additional operating costs per gallon of water used. While these operating costs are easier to project than the capital costs, there is still some uncertainty in the amount the organization will need to charge because the operating costs also have a substantial fixed component and, therefore, the actually costs won't be known until the system is operational and the number of members who hook up is known with greater certainty
When Jake developed his cash flow forecasts for a recent grant/loan application, he started with the current membership count and estimated that the number of members would increase by 10 per year for the next five years. He got the rate of 10 new members per year based on the number of new members that the organization signed up in the last year. He did build in estimated fee increases over the next five years to cover new fees that would have to be charged to cover capital and operating costs and also estimated the proportion of members that would be paying just capital costs versus those that would be able to hook up to the system and would also be paying operating costs.
There are 200 households in the anticipated service area for the water system, about 60 of which are now without water. The organization currently has 45 members. The number of homes that are losing water has been about five per year over the last three years. There are groups of households whose wells are not dropping or dropping very slowly. Some of the owners in the systems anticipated service area have already invested thousands of dollars in water capture systems that collect, purify, and store rainwater.
Identify three forecasting issues that you feel this scenario illustrates and that may make the forecast of future cash flows for revenues and explain why you think they may be a threat to the accuracy of Jake's forecast.