Activity Costing, Assigning Resource Costs, Primary and Secondary Activities

Activity Costing, Assigning Resource Costs, Primary and Secondary ActivitiesElmo Clinic has identified three activities for daily maternity care: occupancy and feeding, nursing, and nursing supervision. The nursingsupervisor oversees 150 nurses, 25 of whom are maternity nurses (the other nurses are located in other care areas such as the emergency room andintensive care). The nursing supervisor has three assistants, a secretary, several offices, computers, phones, and furniture. The three assistantsspend 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 nursingsupervisor has a salary of $80,000. She spends 100% of her time supervising. The secretary receives a salary of $35,000 per year. Other costsdirectly 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 patientday). Daily rates can differ between units, but within units the daily rates are the same for all patients. Under the traditional approach, the daily rateis computed by dividing the annual costs of occupancy and feeding, nursing, and a share of supervision by the unit’s capacity expressed in patientdays. 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 costsof 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. Assumethat the maternity unit has three levels of increasing severity: normal patients, cesarean patients, and patients with complications. The pilot studyprovided the following activity and cost information:The pilot study also revealed the following information concerning the three types of patients and their annual demands:Required:1. Calculate the cost per patient day by using a functional-based approach.Answer: $________________ per patient day2. Calculate the cost per patient day by using an activity-based approach. Round activity rates values in intermediate calculations tothe nearest cent, and round final answers to the nearest cent.PatientDaily Rate (per patient day)$Normal$Cesarean$Complications3. 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 inproportion to the pounds of laundry produced. Typically, maternity produces 240,000 pounds per year. How much would thischange the cost per patient day calculated in Requirement 1? Round your answer to the nearest cent.Does it increase, or Decrease ?Answer: $_____________per patient dayNow, describe what information you would need to modify the calculation made in Requirement 2. Under what conditions would thisactivity calculation provide a more accurate cost assignment?Answer: