Question

In: Accounting

The Armidale Clinic is a famous private clinic specialising in cosmetic surgeries. It employs 25 professionals...

The Armidale Clinic is a famous private clinic specialising in cosmetic surgeries. It employs 25 professionals (2 surgeons, 3 physicians and 20 nurses) who work with patients. The average budgeted total compensation per professional is $139,600. Each professional is budgeted to have on average 1,080 billable hours in 2016.

Before the appointment of a new accounting manager, professional labour costs and costs of direct materials and drugs were included in a single direct cost category and were traced to surgeries performed in the clinic on a per-hour basis. All the other costs of the clinic (e.g. legal support, risk management, general affairs, management of the medical records, repair and maintenance of the wards and operating theatres), were allocated to surgeries performed using the average professional labour hours as the allocation base. The budgeted level of indirect costs in 2016 is $4,700,000.

A new accounting manager was appointed at the Armidale Clinic in June 2015. She has just completed a review of the Armidale Clinic costing system. This review included a detailed analysis of the relationship between cosmetic surgeries and the clinic resources.

The review revealed that surgeries performed varied in terms of surgical complexity and nursing care during the recovery period. Moreover, nurses were responsible for the accuracy and completeness of the patients’ case histories and the updating of the medical record system, whereas surgeons and physicians were in charge of the scheduling of patient facilities (wards etc.) and operating theatres usage.

Therefore, the accounting manager concluded that a new system with two direct cost categories and two indirect cost categories would yield more accurate costs.

Direct costs categories:

  1. surgeons/physicians labour, and
  2. nurses labour.

Indirect cost categories

  1. general support and
  2. repair and maintenance of the operating theatre.

Budgeted information for 2016 relating to the direct and indirect cost categories are as follows:

Surgeons/physicians

Nurses

Number of professionals

5

20

Hours of billable time per professional

400

1,250

Total compensation per professional

$190,000

$127,000

General support

Repair and maintenance

Total indirect costs

$1,100,000

$3,600,000

Cost-allocation base

Nurses labour hours

Surgeons/physicians labour hours

  1. The 2016 budgeted indirect cost rate per hour of professional labour under the old accounting system is?
  2. The 2016 budgeted indirect cost rate per hour of professional labour under the new accounting system is?
  3. What is the 2016 budgeted cost of patient XY surgery under the old accounting system, if it used 6 hours of surgeon/physician and 10 hours of nurses’ professional labour?
  4. What is the budgeted cost of patient ZZ surgery under the new accounting system, if it used 3 hours of surgeon/physician and 240 hours of nurses’ professional labour?

Solutions

Expert Solution

The 2016 budgeted indirect cost rate per hour of professional labour under the old accounting system is $4,351.85 being $4,700,000 / 1,080 hours.

The 2016 budgeted indirect cost rate per hour of professional labour under the new accounting system is:

  • General support: $880 being $1,100,000 / 1,250 hours
  • Repair and Maintenance: $9,000 being $3,600,000 / 400 hours
  • (Total: $9,880 [being $880 + $9,000])

The 2016 budgeted cost of patient XY surgery under the old accounting system, if it used 6 hours of surgeon/physician and 10 hours of nurses’ professional labour is:

  • Direct: $2,068.15 being $139,600 x 16 hours/1080 hours
  • Indirect: $69,629.63 being $4,700,000 x 16/1080 hours [or 16 x 4351.85]
  • Total: $71,697.78 [being $2,068.15 + $69,629.63]

The budgeted cost of patient ZZ surgery under the new accounting system, if it used 3 hours of surgeon/physician and 240 hours of nurses’ professional labour is:

  • Direct: $31,410 being $139,600 x 243 hours/1080 hours
  • Indirect:
    General support: $211,200 being $880 x 240 hours
    Repair and Maintenance: $27,000 being $9,000 x 3 hours
  • Total: $269,610 [being $31,410 + $211,200 + $27,000]

Leave a thumbs up if this helps. Feel free to ask for clarifications.


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