Frumerville Hospital has always determined the full cost of serving patients by accounting for the direct and indirect costs of all hospital operations. The hospital uses the step-down method of allocating indirect costs: The costs of nonrevenue producing departments are allocated in sequence to departments they serve, whether or not these produce revenue. Once the costs of a department have been allocated, the costing process for that department is closed, and it receives no further charges. A new CFO has recently joined the hospital after a distinguished career in the manufacturing industry. In that capacity, he initiated activity-based costing (ABC), which resulted in a documented savings to the business. As an accounting assistant, you have been asked to meet with the CFO to discuss the issues involved in implementing ABC in this hospital. A copy of the hospital’s most recent step-down expense distribution is attached.
In preparation for the meeting, answer the following questions by examining the expense distribution:
1.What “activities” do you consider most appropriate in describing the operations of the hospital?
2. What are the cost drivers of these programs?
3. What particular problems do you expect to face in implementing ABC in this hospital?
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