Question

A.

A hospital is analyzing its overhead costs. It is not clear whether the number of patient days or nursing hours would be the best cost driver to use in predicting the hospital’s overhead. The latest information on the hospital is as follows:

Month               Hospital            Nursing             No. of               Overhead          Overhead Cost

                        Overhead          Hours               Patient              Cost Per           Per Patient

                        Costs                                        Days                Nursing Hr.       Day

July                  $965,000           51,000               8,000                $18.92              $120.63

August            $1,000,000          53,000               9,000                $18.86              $111.11

September         $830,000          38,000               8,750                $21.84              $ 94.86

October                        $925,000           43,000               7,000                $21.51              $132.14

November      $1,100,000          65,000              12,000                $16.92              $ 91.67

December         $900,000           42,000             7,900                $21.42              $113.92

                                                                                                                                               

Required:

• Graph the hospital’s overhead costs against the number of patient days. Note: This is for your benefit so that you can answer Question 3; you do not need to submit this graph as part of the assignment.

• Graph the hospital’s overhead costs against nursing hours. Note: This is for your benefit so that you can answer Question 3; you do not need to submit this graph as part of the assignment.

• Based on the graphs that you drew, do the data appear to be straight forward or do you see any potential problems with the data (i.e, do the data points form straight lines)? Please explain.

• Using the high-low method, determine the hospital’s variable cost per nursing hour, rounded to two decimal places.

• Now that you have calculated both the variable and fixed portions hospital overhead costs, write out the equation for hospital overhead costs using the high-low method.

• Using the cost equation that you just wrote, predict hospital overhead costs if 54,000 nursing hours are expended in a month.

• The hospital ran a regression analysis using nursing hours as the cost driver to predict total hospital overhead costs. The regression analysis produced the following data:

Intercept	346245
Slope	12.81796
RSQ	0.909311

Round the variable portion of the regression equation formula to two decimal places. Based on the regression equation formula, what will the predicted total hospital overhead costs be if 54,000 nursing hours are expended during a month?

• The hospital then ran a regression analysis using number of patient days as cost driver. The regression analysis produced the following data:

Intercept	559764
Slope	47.970926
RSQ	0.563496482

Again, round the variable portion of the regression equation to two decimal places. If 9,500 patient days are predicted for a month, what is the total predicted hospital overhead costs using the regression equation?

• Which regression equation, the one using nursing hours as the cost driver or the one using patient days as the cost driver, produces the most accurate correlation (best explanation of) the predicted hospital overhead costs. How do you know that your answer is correct? In other words, justify your answer.

Answer 1

Solution:-