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 $5,934,000 per year and consisted of such items as building depreciation, building maintenance, and building utilities. The cardiology floor and the maternity floor each occupy 19,200 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	$ 567,060	Patient days	21,810
Monitoring	2,090,900	Monitoring hours used	29,870
Feeding	501,630	Patient days	21,810
Nursing care	4,934,600	Nursing hours	224,300
Total	8,094,190

The demands associated with patient severity are also provided:

Severity	Patient Days	Monitoring Hours	Nursing Hours
High	7,700	15,180	135,900
Medium	10,520	11,600	72,400
Low	3,590	3,090	16,000

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. If required, round your answer to the nearest cent.
$ 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 using Unit Based Approch only patient days as the Activity Driver
                                                   = Total cost / Total Patient days
                                                   = $ 8,094,190 / 21,810
                                                   = $371.12 per day

2) Calculation of Activity Rates (Amounts in $)

Activity	Activity Cost (A)	Activity Driver	Quantity (B)	Activity Rate      (A/B)
Lodging and Feeding (Combined)	1,068,690	Patient Days	21,810	$49 per patient day
Monitoring	2,090,900	Monitoring hours used	29,870	$70 per monitoring hour used
Nursing care	4,934,600	Nursing Hours	224,300	$22 per nursing hour

3)

Calculation of charge per patient day for High Severity (Amounts in $)

Activity	Activity used (A)	Activity rate (B)	Allocated cost (A*B)
Lodging and Feeding	7700 patient days	$49 per patient day	377300
Monitoring	15180 monitoring hours	$70 per monitoring hour used	1,062,600
Nursing care	135900 nursing hours	$22 per nursing hour	2,989,800
Total cost allocated (C)			4,429,700
Patient days (D)			7700 days
Charge per patient day (C/D)			$575.29

Calculation of charge per patient day for Medium Severity (Amounts in $)

Activity	Activity used (A)	Activity rate (B)	Allocated cost (A*B)
Lodging and Feeding	10520 patient days	$49 per patient day	515,480
Monitoring	11600 monitoring hours	$70 per monitoring hour used	812,000
Nursing care	72400 nursing hours	$22 per nursing hour	1,592,800
Total cost allocated (C)			$ 2920280
Patient days (D)			10520 Days
Charge per patient day (C/D)			$277.59

Calculation of charge per patient day for Low Severity (Amounts in $)

Activity	Activity used (A)	Activity rate (B)	Allocated cost (A*B)
Lodging and Feeding	3590 patient days	$49 per patient day	175910
Monitoring	3090 monitoring hours	$70 per monitoring hour used	216300
Nursing care	16000 nursing hours	$22 per nursing hour	352000
Total cost allocated (C)			744,210
Patient days (D)			3590
Charge per patient day (C/D)			$207.30