Reference no: EM132690716

Problem - Product costing and decision analysis for a hospital

Healthmark Medical Inc. wishes to determine its product costs. Healthmark offers a variety of medical procedures (operations) that are considered its "products." The overhead has been separated into three major activities. The annual estimated activity costs and activity bases are provided below.

Activity	Budgeted Activity Cost	Activity Base
Scheduling and admitting	$ 300,000	Number of patients
Housekeeping	2,925,000	Number of patient days
Nursing	3,840,000	Weighted care unit
Total costs	$7,065,000

Total "patient days" are determined by multiplying the number of patients by the average length of stay in the hospital. A weighted care unit (wcu) is a measure of nursing effort used to care for patients. There were 160,000 weighted care units estimated for the year. In addition, Healthmark estimated 5,000 patients and 22,500 patient days for the year. (The average patient is expected to have a a little more than a four-day stay in the hospital.)

During a portion of the year, Healthmark collected patient information for three selected procedures, as shown below.

	Activity-Base Usage
Procedure A
Number of patients	230
Average length of stay	x 5 days
Patient days	1,150
Weighted care units	16,000
Procedure B
Number of patients	540
Average length of stay	x 4 days
Patient days	2,160
Weighted care units	5,000
Procedure C
Number of patients	1000
Average length of stay	x 3 days
Patient days	3,000
Weighted care units	20,000

Private insurance reimburses the hospital for these activities at a fixed daily rate of $400 per patient day for all three procedures.

Instructions -

1. Determine the activity rates.

2. Determine the activity cost for each procedure.

3. Determine the excess or deficiency of reimbursements to activity cost.

4. Interpret your results.