Reference no: EM132034812

Problem - Activity Costing, Assigning Resource Costs, Primary and Secondary Activities

Elmo Clinic has identified three activities for daily maternity care: occupancy and feeding, nursing, and nursing supervision. The nursing supervisor oversees 150 nurses, 25 of whom are maternity nurses (the other nurses are located in other care areas such as the emergency room and intensive care). The nursing supervisor has three assistants, a secretary, several offices, computers, phones, and furniture. The three assistants spend 75% of their time on the supervising activity and 25% of their time as surgical nurses. They each receive a salary of $60,000. The nursing supervisor has a salary of $80,000. She spends 100% of her time supervising. The secretary receives a salary of $35,000 per year. Other costs directly traceable to the supervisory activity (depreciation, utilities, phone, etc.) average $170,000 per year.

Daily care output is measured as "patient days." The clinic has traditionally assigned the cost of daily care by using a daily rate (a rate per patient day). Daily rates can differ between units, but within units the daily rates are the same for all patients. Under the traditional approach, the daily rate is computed by dividing the annual costs of occupancy and feeding, nursing, and a share of supervision by the unit's capacity expressed in patient days. The cost of supervision is assigned to each care area based on the number of nurses. A single driver (patient days) is used to assign the costs of daily care to each patient.

A pilot study has revealed that the demands for nursing care vary within the maternity unit, depending on the severity of a patient's case. Assume that the maternity unit has three levels of increasing severity: normal patients, cesarean patients, and patients with complications. The pilot study provided the following activity and cost information:

Activity	Annual Cost	Activity Driver	Annual Quantity
Occupancy and feeding	$1,500,000	Patient days	10,000
Nursing care (maternity)	1,200,000	Hours of nursing care	50,000
Nursing supervision	?	Number of nurses	150

The pilot study also revealed the following information concerning the three types of patients and their annual demands:

Patient Type	Patient Days Demanded	Nursing Hours Demanded
Normal	7,000	17,500
Cesarean	2,000	12,500
Complications	1,000	20,000
Total	10,000	50,000

Required:

1. Calculate the cost per patient day by using a functional-based approach.

2. Calculate the cost per patient day by using an activity-based approach.

3. Conceptual Connection: The hospital processes 1,250,000 pounds of laundry per year. The cost for the laundering activity is $600,000 per year. In a functional-based cost system, the cost of the laundry department is assigned to each user department in proportion to the pounds of laundry produced. Typically, maternity produces 240,000 pounds per year. How much would this change the cost per patient day calculated in Requirement 1? Round your answer to the nearest cent.