Question

East Valley Hospital is a primary medical care facility and trauma center that serves 11 small, rural Midwestern communities within a 40-mile radius. The hospital offers all the medical/surgical services of a typical small hospital. It has a staff of 18 full-time doctors and 20 part-time visiting specialists. East Valley has a payroll of 150 employees consisting of technicians, nurses, therapists, managers, directors, administrators, dieticians, secretaries, data processors, and janitors. Using your (limited) knowledge of a hospital’s operations, identify as many activities as you can that would serve as the basis for implementing an activity-based costing system.

For each of the activities, you listed, identify a cost driver that would serve as a valid measure of the resources consumed by the activity.

Answer 1

1. Activities that would serve as a basis for Activity-based costing

In a hospital, there are mainly three types of patient treatment:

i. OPD (Outpatient Department): The activities in this department include:

a. Reception entry of OPD patients.

b. Registration of patient's data in the OPD system

c. Billing of OPD patients

d. Doctor's judgment

ii. IPD (In-Patient Department): The activities are:

a. Reception entry of IPD patients

b. Registration of patient's data in the IPD system.

c. Billing of IPD patients

d. Laboratory testing

e. Surgery

f. Recovery of patients

g. Discharge of patients

iii. Labs (For testing): The activities here include:

a. Reception entry for Lab testing

b. Registration of patient's data in the diagnosis system

c. Billing

d. Testing for diagnosis

e. Preparation of reports

f. Uploading the results on the hospital website.

2. Cost driver for the activities listed above:

Reception, Registration, and Billing: Number of patients

Doctor's Salary: Mainly based on the Number of the patient served.

Testing and diagnosis: The time taken for analyzing the results.

Surgery: Number of OT (Operation Theatre) Hours.

Recovery: Number of doctor's visits.

Discharge: Number of patients.