5 39 ABC health care Crosstown Health Center runs two programs drug addict

# 5 39 abc health care crosstown health center runs two

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5-39 ABC, health care. Crosstown Health Center runs two programs: drug addict rehabilitation and aftercare (counseling and support of patients after release from a mental hospital). The center’s budget for 2017 follows. Kim Yu, the director of the center, is keen on determining the cost of each program. Yu compiles the following data describing employee allocations to individual programs: Yu has recently become aware of activity-based costing as a method to refine costing systems. She asks her accountant, Gus Gates, how she should apply this technique. Gates obtains the following budgeted information for 2017: Required 1. a. Selecting cost-allocation bases that you believe are the most appropriate for allocating indirect costs to programs, calculate the budgeted indirect cost rates for medical supplies; rent and clinic maintenance; administrative costs for patient charts, food, and laundry; and laboratory services. b. Using an activity-based costing approach to cost analysis, calculate the budgeted cost of each program and the budgeted cost per patient-year of the drug program.
5-54 c. What benefits can Crosstown Health Center obtain by implementing the ABC system? 2. What factors, other than cost, do you think Crosstown Health Center should consider in allocating resources to its programs? SOLUTION (40 min.) ABC, health care. 1a. Medical supplies rate = years - patient of number Total costs supplies Medical = \$242,000 110 = \$2,200 per patient-year Rent and clinic maintenance rate = space of feet square of amount Total costs maint. clinic and Rent = \$138,600 21,000 = \$6.60 per square foot Admin. cost rate for patient-charts food and laundry = years - patient of number Total laundry food, charts, patient manage to costs Admin. = \$484,000 110 = \$4,400 per patient-year Laboratory services rate = tests laboratory of number Total costs services Laboratory = \$92,400 2,100 = \$44 per test These cost drivers are chosen as the ones that best match the descriptions of why the costs arise. Other answers are acceptable, provided that clear explanations are given. 1b. Activity-based costs for each program and cost per patient-year of the alcohol and drug program follow: Drug After-Care Total Direct labor Physicians at \$150,000 × 4; 0 \$ 600,000 ––– \$ 600,000 Psychologists at \$75,000 × 4; 8 300,000 \$ 600,000 900,000 Nurses at \$30,000 × 6; 10 180,000 300,000 480,000 Direct labor costs 1,080,000 900,000 1,980,000 Medical supplies 1 \$2,200 × 50; 60 110,000 132,000 242,000 Rent and clinic maintenance 2 \$6.60 × 9,000; 12,000 59,400 79,200 138,600 Administrative costs to manage patient charts, food, and laundry 3 \$4,400 × 50; 60 220,000 264,000 484,000 Laboratory services 4 \$44 × 1,400; 700 61,600 30,800 92,400
5-55 Total costs \$1,531,000 \$1,406,000 \$2,937,000 Cost per patient-year \$1,531,000 \$30,620 50 = 1 Allocated using patient-years 2 Allocated using square feet of space 3 Allocated using patient-years 4 Allocated using number of laboratory tests 1c. The ABC system more accurately allocates costs because it identifies better cost drivers. The ABC system chooses cost drivers for overhead costs that have a cause-and-effect relationship between the cost drivers and the costs. Of course, Yu should continue to evaluate if better cost drivers can be found than the ones they have identified so far.