210 PART ONE MANAGEMENT ACCOUNTING, INFORMATION AND DECISONS
210 PART ONE MANAGEMENT ACCOUNTING, INFORMATION AND DECISONS
SU M M ARY PRO BLEM S FO R YO U R REVI EW Problem O ne
Non -m an u factu rin g organ ization s often fin d it u sefu l to trace costs to fin al prod- u cts or services. Con sider a h ospital. Th e ou tpu t of a h ospital is n ot as easy to defin e as th e ou tpu t of a factory. Assu m e th e followin g m easu res of ou tpu t in th ree reven u e-produ cin g departm en ts:
D EPARTM EN T
M EASU RES O F O U TPU T*
Radiology
X-ray films processed
Laboratory
Tests administered
Daily Patient Services**
Patient-days of care (that is, the number of patients multiplied by the number of days of each patient’s stay)
* These become the “product” cost objectives, the various revenue-producing activities of a hospital. ** There would be many of these departments, such as obstetrics, pediatrics, and orthopedics. Moreover, there may be both in-patient and out-patient care.
Bu dgeted ou tpu t for 2002 is 60,000 X-ray film s processed in Radiology, 50,000 tests adm in istered in th e Laboratory, an d 30,000 patien ts-days in Daily Patien t Services.
In addition to th e reven u e-produ cin g departm en ts, th e h ospital h as th ree m ain service departm en ts: Adm in istrative an d Fiscal Services, Plan t Operation s an d Main ten an ce, an d Lau n dry. (Of cou rse, real h ospitals h ave m ore th an th ree reven u e-produ cin g departm en ts an d m ore th an th ree service departm en ts. Th is problem is sim plified to keep th e data m an ageable.)
Th e h ospital h as decided th at th e cost driver for Adm in istrative an d Fiscal Services costs is th e direct departm en t costs of th e oth er departm en ts. Th e cost driver for Plan t Operation s an d Main ten an ce is squ are m etres occu pied an d for Lau n dry, kilogram s of lau n dry. Th e pertin en t bu dget data for 2002 are as follows:
D IRECT
SQUARE
D EPARTM EN T
M ETRES KILO GRAM S O F
CO STS
O CCU PIED LAU N D RY
Administrative and Fiscal Services
Plant Operations and Maintenance
Daily Patient Services
1. Allocate service departm en t costs u sin g th e direct m eth od.
2. Allocate service departm en t costs u sin g th e step-dow n m eth od. Allocate Adm in istrative an d Fiscal Services first, Plan t Operation s an d m ain ten an ce secon d, an d Lau n dry th ird.
Chapter 5 Cost Allocation and Activity-Based Costing Systems
3. Com pu te th e cost per u n it of ou tpu t in each of th e reven u e-produ cin g departm en ts u sin g th e costs determ in ed u sin g (a) th e direct m eth od for allocatin g service departm en t costs (requ irem en t 1) an d (b) th e costs determ in ed u sin g th e step-down m eth od for allocatin g service depart- m en t costs (requ irem en t 2).
Solution
1. Th e solu tion s to all th ree requ irem en ts are sh own in Exh ibit 5-11. Th e direct m eth od is presen ted first. Note th at n o service departm en t costs are allocated to an oth er cost driver in th e reven u e-produ cin g depart- m en t on ly. For exam ple, in allocatin g Plan t Operation s an d Main ten an ce, squ are m etres occu pied by th e service departm en ts is ign ored. Th e cost driver is th e 95,000 squ are m etres occu pied by th e reven u e-produ cin g departm en ts.
EX H I BI T 5 - 1 1
Allocation of Service-Department Costs: Two Methods
PLAN T
AD M IN ISTRATIVE
O PERATIO N S
PATIEN T
FISCAL SERVICES M AIN TENAN CE
LAU N D RY
RAD IO LO GY LABO RATO RY SERVICES
Allocation base
Accumulated costs
Sq metres
Kilograms
1. Direct Method Direct department costs before allocation
$400,000 $1,600,000 Administrative and Fiscal Services
133,333 533,334 Plant Operations and Maintenance
10,000 150,000 Total costs after allocation
$568,596 $2,957,019 Product output in films, tests, and patient-days, respectively
50,000 30,000 3a.Cost per unit of output
$ 11.372 $ 98.567 2. Step-Down Method Direct department costs before allocation
$400,000 $1,600,000 Administrative and Fiscal Services
100,000 400,000 Plant Operations and Maintenance
15,000 225,000 Total costs after allocation
$545,000 $3,025,000 Product output in films, tests, and patient-days, respectively
50,000 30,000 3b.Cost per unit of output
† $800,000 ÷ (12,000 + 3,000 + 80,000) = $8.4210526; $8.4210526 × 12,000 sq. metres = $101,052; etc. †† $200,000 ÷ (80,000 + 20,000 + 300,000) = $.50; $.50 × 80,000 = $40,000; etc. § $1,000,000 ÷ ($800,000 + $200,000 + $1,000,000 + $400,000 + $1,600,000) = $0.25; $0.25 × $800,000 = $200,000; etc. ¶ $1,000,000 ÷ (5,000 + 12,000 + 3,000 + 80,000) = $10.00; $10.00 x 5,000 sq. metres = $50,000; etc. # $300,000 ÷ (80,000 + 20,000 + 300,000) = $.75; $.75 × 80,000 = $60,000; etc.