Blog

CHAPTER 6Example 6A: Direct and Indirect CostsReview the chapter text regarding direct and indirect costs. In particular, review the example of ambulance direct costs (Exhibit 6–1) and indirect costs (Exhibit 6–2). Remember that indirect costs are shared and are sometimes called joint costs or common costs. Because such costs are shared they must be allocated. Also, remember that one test of a direct cost is to ask: “If the operating unit (such as a department) did not exist, would this cost not be in existence?”Practice Exercise 6–I: Identifying Direct and Indirect CostsMake a worksheet with two columns: Direct Cost and Indirect Cost. Place each of the following items in the appropriate column:• Managed care marketing expense• Real estate taxes• Liability insurance• Clinic telephone expense• Utilities (for the entire facility)• Emergency room medical suppliesAssignment Exercise 6–1: Allocating Indirect CostsStudy Table 6–1, Table 6–2, and review the chapter text describing how the indirect cost is allocated. This assignment will change the allocation bases input for (A) Number of Visits (Volume), (B) Proportion of Direct Costs, and (C) Number of Computers in Service.Required1. Compute the costs allocated to cost centers “Clerical Salaries,” “Administrative Salaries,” and “Computer Services” using the new allocation bases shown below. Use worksheet #1 that replicates the set up in Table 6–2. Total the new results. The new allocation bases are:A = # Visits (Volume): PT = 9,600/OT = 4,000/ST = 2,400/Total = 16,000 (16,000 × $3.50 = $56,000)B = Proportion of Direct Costs: PT = 60%/OT = 25%/ST = 15%/Total = 100% (% × $55,000)C = # Computers in Service: PT = 10/OT = 3/ST = 3/Total = 16 (16 × $5,000 each = $80,000).2. Using worksheet #2 that replicates the set up in Table 6–1, enter the new direct cost and the new totals for indirect costs resulting from your work. Total the new results.Practice Exercise 6–II: Responsibility CentersThe Metropolis Health System has one director who supervises the areas of Security, Communications, and Ambulance Services. This director also supervises the medical records relevant to Ambulance Services, the educational training for Security and Ambulance Services personnel, and the human resources for Security, Communications, and Ambulance Services personnel.RequiredOf the duties and services described, all of which are supervised by one director, which areas should be responsibility centers and which areas should be support centers? Draw them in a visual and indicate the reporting requirements.Assignment Exercise 6–2: Responsibility CentersChoose among the Case Study in Chapter 27, the clinic in Mini-Case Study 2, or the Metropolis Health System information as contained in its Case Study and the Appendix that contains its financial statements. Designate the responsibility centers and the support centers for the organization selected. Prepare a rationale for the structure you have designed. CHAPTER 7Example 7A: Fixed, Variable, and Semivariable DistinctionReview the chapter text for the distinction between fixed, variable, and semivariable costs. Pay particular attention to the accompanying Figures 7–1 through 7–5.Practice Exercise 7–I: Analyzing Mixed CostsThe Metropolis Health System (MHS) has a system-wide training course for nurse aides. The course requires a packet of materials that MHS calls the training pack. Due to turnover and because the course is system-wide, there is a monthly demand for new packs. In addition, the local community college also obtains the training packs used in their credit courses from MHS.The education coordinator needs to know how much of the cost is fixed and how much of the cost is variable for these training packs. She decides to use the high–low method of computation.RequiredUsing the monthly utilization information presented below, find the fixed and variable portion of costs through the high–low method.MonthNumber of Training PacksCostJanuary1,000  $6,200  February2001,820March2502,350April4003,440May7004,900June3002,730July1501,470August1001,010September1,100  7,150October3002,850November2502,300December1001,010Assignment Exercise 7–1: Analyzing Mixed CostsThe education coordinator decides that the community college packs may be unduly influencing the high–low computation. She decides to rerun the results, omitting the community college volume.Required1. Using the monthly utilization information presented here, and omitting the community college training packs, find the fixed and variable portion of costs through the high–low method. Note that the college only acquires packs in three months of the year: January, May, and September. These dates coincide with the start dates of their semesters and summer school.2. The reason the education coordinator needs to know how much of the cost is fixed is because she is supposed to collect the appropriate variable cost from the community college for their packs. For her purposes, which computation do you believe is better? Why?MonthTotal Number of Training PacksTotal CostCommunity College Number PacksCommunity College CostJanuary1,000  $6,200  200$1,240  February2001,820  March2502,350  April4003,440  May7004,9003002,100June3002,730  July1501,470  August1001,010  September1,100  7,1503001,950October3002,850  November2502,300  December1001,010  Example 7B: Contribution MarginComputation of a contribution margin is simplified if the fixed and variable expense has already been determined. Examine Table 7–1, which contains Operating Room fixed and variable costs. We can see that the total costs are $1,217,756. Of this amount, $600,822 is designated as variable cost and $616,934 is designated as fixed ($529,556 1 $87,378 = $616,934). For purposes of our example, assume the Operating Room revenue amounts to $1,260,000. The contribution margin is computed as follows: AmountRevenue$1,260,000Less Variable Cost    (600,822)Contribution Margin  $659,178Thus, $659,178 is available to contribute to fixed costs and to profit. (In this example fixed costs amount to $616,934, so there is an amount left to contribute toward profit.)Practice Exercise 7–II: Calculating the Contribution MarginGreenside Clinic has revenue totaling $3,500,000. The clinic has costs totaling $3,450,000. Of this amount, 40% is variable cost and 60% is fixed cost.RequiredCompute the contribution margin for Greenside Clinic.Assignment Exercise 7–2: Calculating the Contribution MarginThe Mental Health program for the Community Center has just completed its fiscal year end. The program director determines that his program has revenue for the year of $1,210,000. He believes his variable expense amounts to $205,000 and he knows his fixed expense amounts to $1,100,000.Required1. Compute the contribution margin for the Community Center Mental Health Program.2. What does the result tell you about the program?