Question

vGordon County Hopsital

In a remote part of the county Gordon County Hospital has established a clinic that provides two basic types of services, routine office visits (ROV) and emergency care (EC). Because you impressed the CEO with your work on costing at the hospital, you were asked to cost out services at the remote clinic. Because you feel that ABC Costing enables a better understanding of the cost dynamics in any entity, you decided to employ ABC for this project. As a result, you analyzed activities and associated costs with the help of clinic personnel and created the following schedule:

Cost DATA
			Activity Data
Activity	Annual Costs	Cost Driver	ROV	EC	Total
Check-in	$          50,000	Number of visits	5,000	5,000	10,000
Assessment	$          75,000	Number of minutes per visit	5	10	75,000
Diagnosis	$       250,000	Number of minutes per visit	10	15	125,000
Treatment Procedure	$       450,000	Number of minutes per visit	10	20	150,000
Prescription	$            2,500	Drugs prescribed per visit	0.5	2	12,500
Check-out	$          50,000	Number of visits	5,000	5,000	10,000
Billing	$       150,000	Number of bills per visit	1	2	15,000
Total costs	$    1,027,500

A)Use ABC costing to calculate the total cost per visit of ROV and EC.

B) Once you have total cost per visit of each type of service, what clues do you have about how to reduce costs? Be careful to not make suggestions that may impact quality of care in search of reduced costs.

Answer 1

a. The costs will be divided between ROV and EC based on the cost drivers. So annual costs for check in will be divided as follows for ROV: $50,000/10,000*5,000 = $25,000. For EC it will be $50,000/10,000*5,000 = $25,000

For assessment the cost will be divided as follows: 75,000/(5*5000)+(10*5000) = $1 per assessment. Thus cost for ROV = $1*5*5,000 = $25,000

The results are shown below:

Activity	Annual Costs	Cost Driver	ROV	EC	Total			Cost per unit of cost driver	Cost assigned to ROV	Cost assigned to EC
Check-in	$          50,000	Number of visits	5,000	5,000	10,000			5.00	25,000.00	25,000.00
Assessment	$          75,000	Number of minutes per visit	5	10	75,000			1.00	25,000.00	50,000.00
Diagnosis	$       250,000	Number of minutes per visit	10	15	125,000			2.00	100,000.00	150,000.00
Treatment Procedure	$       450,000	Number of minutes per visit	10	20	150,000			3.00	150,000.00	300,000.00
Prescription	$            2,500	Drugs prescribed per visit	0.5	2	12,500			0.20	500.00	2,000.00
Check-out	$          50,000	Number of visits	5,000	5,000	10,000			5.00	25,000.00	25,000.00
Billing	$       150,000	Number of bills per visit	1	2	15,000			10.00	50,000.00	100,000.00
Total costs	$    1,027,500							Total costs	375,500.00	652,000.00
ROV EC Total costs                       375,500.00                   652,000.00 No. of visits                            5,000.00                        5,000.00 Costs per visit                                  75.10                           130.40								Grand total	1,027,500.00

b. As we can see that costs per visit for EC is much higher at $130.40 per visit ($652,000/5,000 visits). The cost per visit for ROV is $75.10 ($375,500/5,000) = $75.10 per visit.

To reduce costs the hospital should strive to optimize the number of bills per visit. Also the number of checks and check outs should be optimized to better manage the check in and check out costs. These will also have no impact on the quality of care as well.