In: Accounting
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:
Indirect cost categories
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 |
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:
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:
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:
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