Scenario

PART I:

INVENTORY CONCEPTS AND CALCULATIONS

REQUIRED ELEMENTS

RESPONSE

In your own words, discuss the inventory concept.

List an example of a hospital inventory item. Describe how this item moves from inventory to COGS (Cost of Goods Sold).

INVENTORY CALCULATION STORY PROBLEM:

ABC Pharmacy began the year with 300 units of Product A in inventory with a unit cost of $40. The following additional purchases of the product were made:

· April 1, 200 units @ $50 each

· July 1, 300 units @ $55 each

· Sept.15, 350 units @ $60 each

· Nov. 20, 200 units @ $65 each

At end of year, ABC Pharmacy had 400 units of its product unsold. Your task is to calculate cost of ending inventory as well as cost of goods sold by (a) FIFO, (b) LIFO, and (c) Weighted-Average.

Use the information in the table below to assist you in calculating the three different inventory methods shown under Inventory Methods.

Month

Units

Cost per Unit

Amount

1-Jan

Begin Inv.

300

40

$12,000

1-Apr

200

50

$10,000

1-Jul

300

55

$16,500

15-Sep

350

60

$21,000

20-Nov

200

65

$13,000

Totals

1350

$72,500

Make sure to show your work in each of the cells below for FIFO, LIFO, and Weighted-Average.

INVENTORY METHODS

FIFO:

FIFO:

400 Units Left in Inventory

LIFO:

LIFO:

400 Units Left in Inventory

Weighted-Average

Weighted -Average

$72,500

1350

$54

Average Cost per Unit

400 Units left in Inventory

PART 2:

DEFINE THE FIVE (5) METHODS FOR COMPUTING BOOK DEPRECIATION

As the Practice Manager, you are tasked with explaining the depreciation methods to Dr. Smith and Dr. Brown. Write an explanation of each method in your own words.

Straight Line Depreciation

Include what is meant by salvage value.

Accelerated Book Depreciation: Sum of Years’ Digits Method

Accelerated Book Depreciation: Double Declining Balance Method

Accelerated Book Depreciation: 150% Declining Balance Method

PART 3:

CALCULATING DEPRECIATION

As the manager of Dr. Smith and Dr. Brown’s practice, you need to decide whether to purchase new equipment. Use the following information for the depreciation method calculations. You must show your work in the blank cells provided.

Example of Straight-Line Depreciation Method

Use the following information to calculate the Straight Line

· Fixed asset cost: $20,000

· Useful life: five years

· Residual value: $2,000

Depreciation Method

Calculation

Cost

Residual Value

Useful Life

Depreciation Amount

Straight-Line

Cost – Residual Value/Useful Life

$20,000

$2,000

5

$3,600

End of Year

Cost of Equipment

Yearly Depreciation Expense

Accumulated Depreciation, End of Year

Book Value,

End of Year (Cost Accumulation Depreciation)

Ending Residual Value

Example of Accelerated Book Depreciation: SYD (Sum of Years’ Digits) Method

Use the following information to calculate the SYD:

· Fixed asset cost: $20,000

· Useful life: five years

· Residual value: $2,000

Depreciation Method

Cost

Residual Value

Useful Life

Sum of Year’s Digits

$20,000

$2,000

$18,000

5

End of Year

(Cost Minus Residual)

Fraction for Year

=

Yearly Depreciation Expenses

Accumulation Depreciation End of Year

Book Value, End of Year (Cost Accumulation Depreciation)

1

2

3

4

5

Ending Residual Value

Example of Accelerated Book Depreciation: DDB (Double Declining Balance) Method

· Fixed asset cost: $72,340

· Useful life: five years

· Salvage value: $10,000

Depreciation Method

Calculation:

Cost to be Depreciated

Salvage Value

Useful Life

Straight-Line Factor

Double Declining Factor

DDB

Cost Residual Value/Useful Life

72, 340

10,000

5

0.2

0.4

Years of Useful Life

Initial cost and then the Carry Forward Book Value

Double-Declining Factor

Annual Depreciation Expense

Accumulated Depreciation (Reserve for Depreciation)

Net Remaining Underpreciated (Net Book Value)

1

$72,340

0.4

$

$

$

2

0.4

$

$

$

3

0.4

$

$

$

*4

0.2

$

$

$

*5

0.2

$

$

$

Salvage Value

*DDB is used for the first three years, then the SL method is used for the last two years. Therefore, the Double-Declining factor is shown for 3 years and the Straight-Line factor is shown for year 4 and 5.

PART 4:

ANALYSIS OF DEPRECIATION METHODS

No matter which type of health care organization, as a manager, you need to be able to choose the best depreciation method for that type of organization based on the fixed asset being purchased. With that said, complete the following:

Choose one of the depreciation methods that you feel would be more feasible for a hospital to use. Explain your rationale.

Choose one of the depreciation methods that you feel would be more feasible for a physician practice to use. Explain your rationale.

Explain why it is important for a health care organization or a physician practice to use a depreciation method.

PART 5:

RECOMMENDATION

What depreciation method do you recommend Dr. Smith and Dr. Brown use to purchase a fixed asset? Explain the rationale for your choice.

REFERENCES

List your References in APA Format as outlined in the assignment directions.