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 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

Questions.

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

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

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?

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

There are total 4 parts in the above given question.

  1. Calculation of 2016 budgeted indirect cost rate per hour of professional labor under the old accounting system:

Indirect cost

Amount / units

Budgeted cost

$4,700,000

Number of professional labor hour

                                               27,000

(1080 hours * 25 personnel)

Budgeted indirect cost rate

$ 174

($4,700,000 / 27,000)

2. Calculation of 2016 budgeted indirect cost rate per hour of professional labour under the new accounting system:

In the new accounting system there are 2 categories for each direct and indirect cost allocation. Hence first we will calculate number of hours for each category and then we will calculate indirect cost rate per hour by dividing the cost by each category with the number of hours for each category. Number of hours by cost allocation category are:

Particulars

Surgeons/ physicians

Nurses

Number of professionals (A)

5

20

Hours of billable time per professional (B)

400

1,250

Total hours (A*B)

2,000

25,000

Budgeted indirect cost rate per hour of professional labour under the new accounting system

Indirect cost

Amount / units

Amount / units

Particulars

General support

Repairs and maintenance

Budgeted cost

$ 1,100,000

$ 3,600,000

Cost allocation base

Nurses labour hours

Surgeons / physicians labour hours

Number of professional labour hour

25,000

2,000

Refer above table for number of hours calculation

Refer above table for number of hours calculation

Budgeted indirect cost rate by category

                                               $44

$1,800

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?

For calculating the budgeted cost of patient XY surgery we need first calculate direct cost rate per hour and indirect cost rate per hour under old accounting system and then we will compute the budgeted cost of surgery for patient XY

Particulars

Amount / units

Direct cost rate per hour

Compensation cost

$3,490,000

(139600* 25 personnel)

Number of labour hours

                                               27,000

(1080 hours * 25 personnel)

Direct labour cost per hour

$129

Number of hours taken for surgery

Surgeon / physician

6 hours

Nurse

10 hours

Total

16 hours

Total direct cost (A)

$ 2,068

(16 hours * $129 per hour)

Indirect cost per hour (refer answer of sub-part 1 above)

$174

Total Indirect cost (B)

$2,784

(16 hours * $174 per hour )

Total budgeted cost of surgery for patient XY (A+B)

$ 4,852

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?

For calculating the budgeted cost of patient ZZ surgery we need first calculate direct cost rate per hour and indirect cost rate per hour under new accounting system and then we will compute the budgeted cost of surgery for patient ZZ:

Direct labour cost rate per hour calculation:

Particulars

Surgeons/ physicians

Nurses

Number of professionals (A)

5

20

Hours of billable time per professional (B)

400

1,250

Total hours (A*B)

2,000

25,000

Compensation per professional

$ 190,000

$ 127,000

Total compensation

$ 950,000

$ 2,540,000

Direct labour cost rate per hour

$ 475

$ 102

(Total compensation / total hours)

(Total compensation / total hours)

Calculation of surgery cost of ZZ as per new accounting system

Particulars

Amount / units

Number of hours taken for surgery

Surgeon / physician

3 hours

Nurse

240 hours

Direct cost of surgery (number of hours * Direct cost per hour)

Surgeon / physician cost

$ 1,425

Nurse cost

$24,480

Total Direct cost (A)

$25,905

Indirect cost per hour rate (refer answer of sub-part 2 above)

Surgeon / physician

$ 1,800 per hour

Nurse

$ 44 per hour

Indirect cost of surgery (number of hours * Indirect cost per hour)

Surgeon / physician cost

$ 5,400

Nurse cost

$ 10,560

Total Indirect cost (B)

$15,960

Total cost of surgery of ZZ (A+B)

$41,865

Note: Calculation of rate per hour has been rounded off to nearest dollar amount.


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