Hospital costs

Gotham city hospital unionized. In 2006 received an average annual Salary of $45,000. The hospital administrator is considering change in the contract with nurses for 2007. In turn, the hospital may also change the way it charges nursing costs to each department.

The hospital each department accountable for its financial performance and it allocates     revenues and expenses to departments. Consider the expenses of the obstetrics department in 2006.

Variable expenses (based on 2006 patient-days) are:

 Fixed expenses (based on number of beds) are:

Management assigns nurses to departments on the basis of annual patient-days as follows:

Total patient-days are the number of patient multiplied by the number of days they are hospitalized. The hospital charges each department for the salaries of the nurses assigned to it.
During 2006, the obstetrics department had a capacity of 60 beds, billed each patient an average of $810 per day, and had revenues of $12, 15 million.

Questions

$11.     Compute the 2006 volume of activity in patient-days.

$12.     Compute the 2006 patient-days that would have been necessary for the obstetrics department to recoup all fixed expenses except nursing expenses.

$13.     Compute the 2006 patient-days that would have been necessary for the obstetrics department to breakeven including nurses salaries as fixed cost.

$14.     Suppose obstetrics must pay $200 per patient-day for nursing services. This plan would replace the two-level, fixed –cost system employed in 2006.compute what the break-even point in patient-days would have been in 2006 under this plan.

Answer

$11.       $12,150,000= 15,000 patient-days

                  $810

$12.       Variable costs = $3,300,000 = $220 per patient-day

                                         15,000

Contribution margin = $810 - $220 = $590 per patient-day

To recoup the fixed expenses:

$5,900,000 ÷ $590 = 10,000 patient-days

$13.        The fixed cost levels differ as the relevant range changes:

(1) $45,000 x 30 = $1,350,000

(2) $45,000 x 35 = $1,575,000

To break even on higher level of fixed costs:

$7,250,000 ÷ $590 = 12,288 patient-days

This answer exceeds the higher-level maximum; therefore, this answer is infeasible.

The department must operate at a $7,475,000 level of fixed costs to break even:

$7,475,000 ÷ $590 = 12,669 patient-days.

$14.       The nursing costs would have been variable instead of fixed. The contribution margin per patient-day would have been $810 - $220 - $200 = $390. The break-even point would be higher: $5,900,000 ÷ 390 = 15,128 patient-days.

Chapter (1): 2-A1 and 2-A2 Chapter (3): 3-50 and 3-53 Chapter (4): 4-A1 and 4-A2 Chapter (5): 5-A1 and 5-A2 Chapter (6): 6-A1

Assignment No 1

Sheet 3, Page 5, Example 2

Example 2

The following information is extracted from the accounts of Tata Ltd for the 2^nd quarter of the year 2011 (in units only)

Additional information

1. The closing stock of finished goods on 31 March was 6,000 units
2. The variable cost of production per unit is SDG 58 made up as follows
   Direct material27
   Direct labour22
   Variable production overheads9
3. Fixed production overheads are estimated at SDG 280,000 per month and are absorbed into the cost of production of the unit produced by a budgeted absorption rate calculated on the basis of the normal level of production of 20,000 units per month
4. The selling price per unit is determined by adding a gross profit margin of 25% of the total cost of production per unit to that cost.

Required:

1. Prepare a month by month and in total the profit and loss account for the 2^nd quarter using:

• .Absorption costing method
• Marginal costing method

1. Explain the difference between the two methods as to:

• Closing stock valuation
• The reported profit

Solution:

Absorption rate per unit = Fixed cost / Normal production = 280,000/20,000 = 14 SDG per unit

Production cost using full costing:

 Production cost using marginal costing

To calculate opening and closing stocks:

Selling price = total cost of production + 25%

                        = 72 + 18 = 90

Using full costing:

Using marginal costing

The difference in closing stock valuation = 216,000 – 174,000 = 42,000

The difference in reported profits = 1,144,000 – 1,102,000 = 42,000

This difference is attributed to the fixed overheads x units in the period

Opening stock – closing stock = 6,000 – 3,000 = 3,000

Fixed overheads per unit = 14

3,000 x 14 = 42,000 (which is the difference in profit and closing stock valuation)