Question

ABC, Resource Drivers, Service Industry

Glencoe Medical Clinic operates a cardiology care unit and a maternity care unit. Colby Hepworth, the clinic’s administrator, is investigating the charges assigned to cardiology patients. Currently, all cardiology patients are charged the same rate per patient day for daily care services. Daily care services are broadly defined as occupancy, feeding, and nursing care. A recent study, however, revealed several interesting outcomes. First, the demands patients place on daily care services vary with the severity of the case being treated. Second, the occupancy activity is a combination of two activities: lodging and use of monitoring equipment. Since some patients require more monitoring than others, these activities should be separated. Third, the daily rate should reflect the difference in demands resulting from differences in patient type. Separating the occupancy activity into two separate activities also required the determination of the cost of each activity. Determining the costs of the monitoring activity was fairly easy because its costs were directly traceable. Lodging costs, however, are shared by two activities: lodging cardiology patients and lodging maternity care patients. The total lodging costs for the two activities were $5,755,000 per year and consisted of such items as building depreciation, building maintenance, and building utilities. The cardiology floor and the maternity floor each occupy 21,100 square feet. Hepworth determined that lodging costs would be assigned to each unit based on square feet.

To compute a daily rate that reflected the difference in demands, patients were placed in three categories according to illness severity, and the following annual data were collected:

Activity	Cost of Activity	Activity Driver	Quantity
Lodging	$ 573,750	Patient days	21,250
Monitoring	2,259,350	Monitoring hours used	30,950
Feeding	403,750	Patient days	21,250
Nursing care	4,267,400	Nursing hours	224,600
Total	7,504,250

The demands associated with patient severity are also provided:

Severity	Patient Days	Monitoring Hours	Nursing Hours
High	7,420	15,130	133,100
Medium	10,720	12,360	74,200
Low	3,110	3,460	17,300

Required:

1. Suppose that the costs of daily care are assigned using only patient days as the activity driver (which is also the measure of output). Compute the daily rate using this unit-based approach of cost assignment. If required, round your answer to the nearest cent.
$ per day

2. Compute activity rates using the given activity drivers (combine activities with the same driver). If required, round your answers to the nearest cent.

Rate 1	$ per patient day
Rate 2	$ per monitoring hour
Rate 3	$ per hour of nursing care

3. Compute the charge per patient day for each patient type using the activity rates from Requirement 2 and the demands on each activity. Round your interim calculations and final answers to the nearest cent.

High severity	$ per patient day
Medium severity	$ per patient day
Low severity	$ per patient day

Answer 1

1) Computation of Daily rate using the patient days only as activity driver:-

Daily Rate = Total Cost of all Activities / Total Patient days

Total Cost of all Activities =  Lodging+ Monitoring+ Feeding+ Nursing Care

= $ 573,750 +$2,259,350 +$403,750+$4,267,400 = $7,504,250

Total Patient days = 21,250    

Daily Rate = $7,504,250/21,250 = $353.1411 = $353

2) Computation of Activity Rate using the activity drivers:-

Activity	Cost of Activity(A)	Activity Driver	Quantity (B)	Activity Cost per activity driver (C= A/B)
Lodging +Feeding	$ 977,500	Patient Days	21,250	$46
Monitoring	$ 2,259,350	Monitoring hours	30,950	$73
Nursing Care	$ 4,267,400	Nursing Hours	224,600	$19

3) Computation of Charge per patient day using the activity rates calculated above and demands on each activity.

Severity	Patient Days	Cost per patient day	Total Patient Cost	Monitoring Hours	Cost per Monitoring day	Total Monitoring Cost	Nursing Hours	Cost per Nursing Hours	Total Nursing Cost	Total Cost	Charge per patient day
	(a)	(b)	(c=a*b)	(d)	(e)	(f=d*e)	(g)	(h)	(i=g*h)	(j=c+f+i)	(k=j/a)
High	7,420	$46	$341,320	15,130	$73	$1,104,490	133,100	$19	$2,528,900	$3,974,710	$536
Medium	10,720	$46	$493,120	12,360	$73	$902,280	74,200	$19	$1,409,800	$2,805,200	$262
Low	3,110	$46	$143,060	3,460	$73	$252,580	17,300	$19	$328,700	$724,340	$233
Total	21,250		$977,500	30,950		$2,259,350	224,600		$4,267,400	$7,504,250