HAS Assignment 2
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assignment_2.docx1. Assignment Exercises 6-1 and 6-2
2. Assignment Exercises 7-1 and 7-2
Example 6A: Direct and Indirect Costs
Review the chapter text regarding direct and indirect costs. In particular, review the example of ambulance direct costs (Exhibit 6–1) and indirect costs (Exhibit 6–2). Remember that indirect costs are shared and are sometimes called joint costs or common costs. Because such costs are shared they must be allocated. Also, remember that one test of a direct cost is to ask: “If the operating unit (such as a department) did not exist, would this cost not be in existence?”
Exhibit 6–1 Example of Ambulance Direct Costs
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Ambulance salaries & benefits $32,500 |
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RN salaries & benefits 9,600 |
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Vehicle expense 21,300 |
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Supplies 5,000 |
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Uniforms 1,200 |
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Employee education 3,900 |
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Purchased services 1,900 |
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Purchased maintenance 2,600 |
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Utilities & telephone 5,000 |
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Vehicle depreciation 15,000 |
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Miscellaneous expense 2,000 |
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Total direct costs $100,000 |
Exhibit 6–2 Example of Ambulance Indirect Costs
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Administrative costs $12,000 |
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Facility costs 8,000 |
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Total indirect costs $20,000 |
Practice Exercise 6–I: Identifying Direct and Indirect Costs
Make a worksheet with two columns: Direct Cost and Indirect Cost. Place each of the following items in the appropriate column:
· Managed care marketing expense
· Real estate taxes
· Liability insurance
· Clinic telephone expense
· Utilities (for the entire facility)
· Emergency room medical supplies
Assignment Exercise 6–1: Allocating Indirect Costs
Study Table 6–1, Table 6–2, and review the chapter text describing how the indirect cost is allocated. This assignment will change the allocation bases input for (A) Number of Visits (Volume), (B) Proportion of Direct Costs, and (C) Number of Computers in Service.
Required
1. Compute the costs allocated to cost centers “Clerical Salaries,” “Administrative Salaries,” and “Computer Services” using the new allocation bases shown below. Use worksheet #1 that replicates the set up in Table 6–2. Total the new results.
The new allocation bases are:
A = # Visits (Volume): PT = 9,600/OT = 4,000/S
T = 2,400/Total = 16,000 (16,000 × $3.50 = $56,000)
B = Proportion of Direct Costs: PT = 60%/OT = 25%/ST = 15%/Total = 100% (% × $55,000)
C = # Computers in Service: PT = 10/OT = 3/ST = 3/Total = 16 (16 × $5,000 each = $80,000).
2. Using worksheet #2 that replicates the set up in Table 6–1, enter the new direct cost and the new totals for indirect costs resulting from your work. Total the new results.
Practice Exercise 6–II: Responsibility Centers
The Metropolis Health System has one director who supervises the areas of Security, Communications, and Ambulance Services. This director also supervises the medical records relevant to Ambulance Services, the educational training for Security and Ambulance Services personnel, and the human resources for Security, Communications, and Ambulance Services personnel.
Required
Of the duties and services described, all of which are supervised by one director, which areas should be responsibility centers and which areas should be support centers? Draw them in a visual and indicate the reporting requirements.
Assignment Exercise 6–2: Responsibility Centers
Choose among the Case Study in Chapter 27, the clinic in Mini-Case Study 2, or the Metropolis Health System information as contained in its Case Study and the Appendix that contains its financial statements. Designate the responsibility centers and the support centers for the organization selected. Prepare a rationale for the structure you have designed.
Table 6–1 Examples of Rehab Cost Center Direct and Indirect Cost Totals
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Rehab Cost Centers Direct Cost Indirect Cost Total |
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Physical Therapy (PT) $410,000 $107,500 $517,500 |
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Occupational Therapy (OT) 190,000 44,000 234,000 |
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Speech Therapy (ST) 120,000 33,500 153,500 |
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Total $720,000 $185,000 $905,000 |
Note: Direct Cost proportions, rounded, are as follows:
PT = 57%/OT = 26%/ST = 17%/Total = 100%
Courtesy of J.J. Baker and R.W. Baker, Dallas, Texas.
Table 6–2 Example of Indirect Costs Allocated to Rehab Cost Center
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Clerical Salaries Administrative Salaries Computer Services Total Indirect Cost |
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Allocation Basis: A B C ; |
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Indirect Cost to Be Allocated $60,000 $50,000 $75,000 $185,000 |
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Allocated to: 34,000 28,5000 45,000 107,500 |
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Physical Therapy (PT) 16,000 13,000 15,000 44,000 |
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Occupational Therapy (OT) 10,000 8,5000 15,000 33,500 |
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Speech Therapy (ST) $60,000 $50,000 $75,000 $185,000 |
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Proof Total |
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Allocation Key: |
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A = # Visits (Volume): PT = 8500/OT = 4000/ST = 2500/Total = 15,000 (15,000 x $4.00 = $60,000) |
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B = Proportion of Direct Costs: PT = 57%/OT = 26%/ST = 17%/Total = 100% (% x $50,000) |
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C = # Computers in Service: PT = 9/OT = 3/ST = 3/Total = 15 (15 x $5,000 each = $75,000) |
Practice Exercise 7–I: Analyzing Mixed Costs
The Metropolis Health System (MHS) has a system-wide training course for nurse aides. The course requires a packet of materials that MHS calls the training pack. Due to turnover and because the course is system-wide, there is a monthly demand for new packs. In addition, the local community college also obtains the training packs used in their credit courses from MHS.
The education coordinator needs to know how much of the cost is fixed and how much of the cost is variable for these training packs. She decides to use the high–low method of computation.
Required
Using the monthly utilization information presented below, find the fixed and variable portion of costs through the high–low method.
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Month Number of Training Packs Costs |
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January 1,000 $6,200 |
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February 200 1,820 |
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March 250 2,350 |
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April 400 3,440 |
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May 700 4,900 |
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June 300 2,730 |
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July 150 1,470 |
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August 100 1,010 |
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September 1,100 7,150 |
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October 300 2,850 |
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November 250 2,300 |
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December 100 1,010 |
Assignment Exercise 7–1: Analyzing Mixed Costs
The education coordinator decides that the community college packs may be unduly influencing the high–low computation. She decides to rerun the results, omitting the community college volume.
Required
1. Using the monthly utilization information presented here, and omitting the community college training packs, find the fixed and variable portion of costs through the high–low method. Note that the college only acquires packs in three months of the year: January, May, and September. These dates coincide with the start dates of their semesters and summer school.
2. The reason the education coordinator needs to know how much of the cost is fixed is because she is supposed to collect the appropriate variable cost from the community college for their packs. For her purposes, which computation do you believe is better? Why?
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Month Total Number of Total Costs Community College Community College Cost Training Packs Number Packs |
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January 1,000 $6,200 200 $1,240 |
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February 200 1,820 |
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March 250 2,350 |
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April 400 3,440 |
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May 700 4,900 300 2,100 |
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June 300 2,730 |
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July 150 1,470 |
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August 100 1,010 |
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September 1,100 7,150 300 1,950 |
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October 300 2,850 |
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November 250 2,300 |
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December 100 1,010 |
Example 7B: Contribution Margin
Computation of a contribution margin is simplified if the fixed and variable expense has already been determined. Examine Table 7–1, which contains Operating Room fixed and variable costs. We can see that the total costs are $1,217,756. Of this amount, $600,822 is designated as variable cost and $616,934 is designated as fixed ($529,556 1 $87,378 = $616,934). For purposes of our example, assume the Operating Room revenue amounts to $1,260,000. The contribution margin is computed as follows:
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Amount |
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Revenue $1,260,000 |
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Less Variable Cost (600,822)
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Contribution Margin $659,178 |
Thus, $659,178 is available to contribute to fixed costs and to profit. (In this example fixed costs amount to $616,934, so there is an amount left to contribute toward profit.)
Practice Exercise 7–II: Calculating the Contribution Margin
Greenside Clinic has revenue totaling $3,500,000. The clinic has costs totaling $3,450,000. Of this amount, 40% is variable cost and 60% is fixed cost.
Required
Compute the contribution margin for Greenside Clinic.
Assignment Exercise 7–2: Calculating the Contribution Margin
The Mental Health program for the Community Center has just completed its fiscal year end. The program director determines that his program has revenue for the year of $1,210,000. He believes his variable expense amounts to $205,000 and he knows his fixed expense amounts to $1,100,000.
Required
1. Compute the contribution margin for the Community Center Mental Health Program.
2. What does the result tell you about the program?
Table 7–1 Operating Room Fixed and Variable Costs
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Account Total Variable Fixed Equipment |
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Social Security $ 60,51 $ 60,517 $ $ |
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Pension 20,675 20,675 |
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Health Insurance 8,422 8,422 |
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Child Care 4,564 4,564 |
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Patient Accounting 155,356 155,356 |
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Admitting 110,254 110,254 |
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Medical Records 91,718 91,718 |
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Dietary 27,526 27,526 |
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Medical Waste 2,377 2,377 |
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Sterile Procedures 78,720 78,720 |
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Laundry 40,693 40.693 |
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Depreciation-Equipment 87,378 87,378 |
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Depreciation-Building 41,377 41,377 |
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Amortization-Interest (5,819) (5,819) |
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Insurance 4,216 4,216 |
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Administration 57,966 57,966 |
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Medical Staff 1,722 1,722 |
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Community Relations 49,813 49,813 |
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Materials Management 64,573 64,573 |
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Human Resources 31,066 31,066 |
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Nursing Administration 82,471 82,47 |
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Data Processing 17,815 17,815 |
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Fiscal 17,700 17,700 |
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Telephone 2,839 2,839 |
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Utilities 26,406 26,406 |
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Plant 77,597 57,597 |
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Environmental Services 32,847 32,847 |
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Safety 2,016 2,016 |
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Quality Management 10,016 10,016 |
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Medical Staff 9,444 9,444 |
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Continuous Quality Improvement 4,895 4,895 |
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EE Health 569 569 |
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Total Allocated $1,217,756 $600,822 $529,556 $87,378 |
