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 $5,700,000 per year and consisted of such items as building depreciation, building maintenance, and building utilities. The cardiology floor and the maternity floor each occupy 20,000 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 $ 2,850,000 Patient days 22,500 Monitoring 2,100,000 Monitoring hours used 30,000 Feeding 450,000 Patient days 22,500 Nursing care 4,500,000 Nursing hours 225,000 Total $ 9,900,000 The demands associated with patient severity are also provided: Severity Patient Days Monitoring Hours Nursing Hours High 7,500 15,000 135,000 Medium 11,250 12,000 75,000 Low 3,750 3,000 15,000 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. $ 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	Daily rate=Total cost/Patient days=9900000/22500=$ 440 per patient day
2	Activity rates=Activity cost/Activity driver cost
	Activity		Cost $	Activity driver		Activity driver cost	Activity Rate
	Lodging		2850000	Patient days		22500	126.67
	Monitoring		2100000	Monitoring hours		30000	70.00
	Feeding		450000	Patient days		22500	20.00
	Nursing care		4500000	Nursing hours		225000	20.00
3	Charge per patient day:
	For High severity patients:
	Activity		Activity Rate	Activity driver		Activity driver cost	Total cost
	Lodging		126.67	Patient days		7500	950025
	Monitoring		70	Monitoring hours		15000	1050000
	Feeding		20	Patient days		7500	150000
	Nursing care		20	Nursing hours		135000	2700000
	Total cost						4850025
	Patient days						7500
	Charge per patient day						646.67
	For Medium severity patients:
	Activity		Activity Rate	Activity driver		Activity driver cost	Total cost
	Lodging		126.67	Patient days		11250	1425038
	Monitoring		70	Monitoring hours		12000	840000
	Feeding		20	Patient days		11250	225000
	Nursing care		20	Nursing hours		75000	1500000
	Total cost						3990038
	Patient days						11250
	Charge per patient day						354.67
	For low severity patients:
	Activity		Activity Rate	Activity driver	*	Activity driver cost	Total cost
			1			2	1*2
	Lodging		126.67	Patient days		3750	475012.5
	Monitoring		70	Monitoring hours		3000	210000
	Feeding		20	Patient days		3750	75000
	Nursing care		20	Nursing hours		15000	300000
	Total cost						1060013
	Patient days						3750
	Charge per patient day						282.67