Question

Activity-Based Costing for a Service Company

Crosswinds Hospital plans to use activity-based costing to assign hospital indirect costs to the care of patients. The hospital has identified the following activities and activity rates for the hospital indirect costs:

Activity		Activity Rate
Room and meals	$240	per day
Radiology	$215	per image
Pharmacy	$50	per physician order
Chemistry lab	$80	per test
Operating room	$1,000	per operating room hour

The activity usage information associated with the two patients is as follows:

	Abel Putin		Cheryl Umit
Number of days		6 days		4 days
Number of images		4 images		3 images
Number of physician orders		6 orders		2 orders
Number of tests		5 tests		4 tests
Number of operating room hours		8 hours		4 hours

a. Determine the activity cost associated with each patient.

Abel Putin	$
Cheryl Umit	$

b. Why is the total activity cost different for the two patients?

Abel Putin  apparently had a different condition that required more extensive treatment. Thus, the activity cost to Abel Putin  is nearly two  times that of other patient.

Answer 1

Details of activities	Abel Putin			Cheryl Umit
Basis of costs	Cost per unit	Usage	Total cost per activity	Cost per unit	Usage	Total cost per activity
Number of days	$ 240	6 days	$ 1,440	$ 240	4 days	$ 960
Number of imges	$ 215	4 imges	$ 860	$ 215	3 images	$ 645
Number of physician orders	$ 50	6 orders	$ 300	$ 50	2 orders	$ 100
Number of tests	$ 80	5 tests	$ 400	$ 80	4 tests	$ 320
Number of operating room hours	$ 1,000	8 hours	$ 8,000	$ 1,000	4 hours	$ 4,000
Total activity cost of Abel Putin			$ 11,000	Total activity cost of Cheryl Umit		$ 6,025

Total activity cost is different to both the patients because Abel Putin was in severe stage and required more extensive medical care than Cheryl Umit. For Abel Putin more cost incurred by the hospital during his treatment including more number of days, more images, more tests,more physician orders and more operating hours, due to that total activity cost is different for both the patients .