Question

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 $5,608,000 per year and consisted of such items as building depreciation, building maintenance, and building utilities. The cardiology floor and the maternity floor each occupy 18,300 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	$ 543,250	Patient days	21,730
Monitoring	2,028,090	Monitoring hours used	30,270
Feeding	434,600	Patient days	21,730
Nursing care	5,138,200	Nursing hours	223,400
Total	8,144,140

The demands associated with patient severity are also provided:

Severity	Patient Days	Monitoring Hours	Nursing Hours
High	7,420	15,320	131,500
Medium	11,260	12,370	75,800
Low	3,050	2,580	16,100

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 only patient days as the base = Total cost/Total Patient days

= $8,144,140/21,730 = $374.79 per day

2) Calculation of Activity Rates (Amounts in $)

Activity	Activity Cost (A)	Activity Driver	Quantity (B)	Activity Rate (A/B)
Lodging and Feeding	977,850	Patient Days	21,730	$45 per patient day
Monitoring	2,028,090	Monitoring hours used	30,270	$67 per monitoring hour used
Nursing care	5,138,200	Nursing Hours	223,400	$23 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	7,420 patient days	$45 per patient day	333,900
Monitoring	15,320 monitoring hours	$67 per monitoring hour	1,026,440
Nursing care	131,500 nursing hours	$23 per nursing hour	3,024,500
Total cost allocated (C)			4,384,840
Patient days (D)			7,420
Charge per patient day (C/D)			$590.95

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	11,260 patient days	$45 per patient day	506,700
Monitoring	12,370 monitoring hours	$67 per monitoring hour	828,790
Nursing care	75,800 nursing hours	$23 per nursing hour	1,743,400
Total cost allocated (C)			3,078,890
Patient days (D)			11,260
Charge per patient day (C/D)			$273.44

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	3,050 patient days	$45 per patient day	137,250
Monitoring	2,580 monitoring hours	$67 per monitoring hour	172,860
Nursing care	16,100 nursing hours	$23 per nursing hour	370,300
Total cost allocated (C)			680,410
Patient days (D)			3,050
Charge per patient day (C/D)			$223.09