In support of your answer to this part of the assignment, you should consider answering the following questions:
a. What problems arose with the old per-diem costing system? How would the new Activity Based Costing
System (the split-cost accounting system) remedy these problems? How might it affect managements
decisions in respect to patient mix?
b. What would be the difference between the budgeted 1977 routine care cost of the following procedures
under the old accounting method and under the split-cost accounting system?
• a cataract operation;
• a tonsillectomy/adenoidectomy procedure;
• a laryngectomy and radical neck dissection.
What accounts for the differences? Are they significant?
Provide a schedule of supporting calculations to support your answer. Where appropriate calculations
should be to three decimal places.
c. Using the hypothetical data given by Ms. Arndt, how could a hospital using a per diem reimbursement
lose revenue and how much revenue would it lose? In comparison would MEEI lose revenue using the
Activity Based Costing System (the split-cost accounting system)? Provide schedules of supporting
calculations to support your answer. These schedules would include a flexible budget based on Ms
Arndt’s suggested initial level of hospital activity, the standard cost and standard charge (using the same
markup used in Exhibit 5) using both the per diem method and the split-cost (ABC) method, and as a
minimum, the three data sets provided in Exhibit 9. Whilst not specifically required, you may find it
useful to provide a graph of the outcome of each of the data sets. Where appropriate calculations should
be to three decimal places.
2. Undertake research into the relevant literature and provide a report on your findings on how an Activity Based
Costing System (the split-cost accounting system) might be implemented at a less specialised (i.e. general)
hospital. What kinds of implementation problems do you foresee and how would you avoid them?
In reporting on your findings you should;
• Describe and discuss the design of the Activity Based Costing System (the split-cost accounting system).
• Do other industries have the same design problems?
• Include in your description of the Activity Based Costing System (the split-cost accounting system)
• a definition of the products and the customers implicit in the system;
• the criteria for choosing cost drivers.
• What importance or relevance (if any)do you attach to the distinction between procedures and diagnoses?
• What bearing does this distinction have (if any) on the transferability of the MEEI system?
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