A type of accounting process that aims to capture a company's costs of production by assessing the input costs of each step of production as well as fixed costs to aid company management in measuring financial performance.
Exam : Managerial Accounting
Date : 12/09/2015 5:00 pm- 7:00 pm GMT+3
Place : A(1) and A(2)
Targeted : Batch 2015 Semester 2
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:
Meals |
$610.000 |
Laundry |
260.000 |
Laboratory |
900.000 |
Pharmacy |
850.000 |
Maintenance |
150.000 |
Other |
530.000 |
Total |
$ 3.300.000 |
Fixed expenses (based on number of beds) are:
Rent |
$ 3.300.000 |
General administrative services |
2.200.000 |
Janitorial |
200.000 |
Maintenance |
150.000 |
Other |
350.000 |
Total |
$ 5.900.000 |
Management assigns nurses to departments on the basis of annual patient-days as follows:
Volume Level in Patient-days |
Number of Nurses |
10.000-12.000 |
30 |
12.001-16.000 |
35 |
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:
Patient-Days |
Non-Nursing |
Nursing |
Total |
Fixed Expenses |
Fixed Expenses |
Fixed Expenses |
|
10,000-12,000 |
$5,900,000 |
$1,350,000(1) |
$7,250,000 |
12,001-16,000 |
5,900,000 |
1,575,000(2) |
7,475,000 |
(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 2nd quarter of the year 2011 (in units only)
Month |
April |
May |
June |
Production |
18,000 |
20,000 |
21,000 |
Sales |
20,000 |
21,000 |
21,000 |
Additional information
Required:
Solution:
Absorption rate per unit = Fixed cost / Normal production = 280,000/20,000 = 14 SDG per unit
Production cost using full costing:
Direct material |
27 |
Direct labour |
22 |
Variable overheads |
9 |
Fixed overheads |
14 |
Total |
72 |
Production cost using marginal costing
Direct material |
27 |
Direct labour |
22 |
Variable overheads |
9 |
Total |
58 |
To calculate opening and closing stocks:
Month |
April |
May |
June |
Opening stock |
6,000 |
4,000 |
3,000 |
Production |
18,000 |
20,000 |
21,000 |
Total available |
24,000 |
24,000 |
24,000 |
Sales |
20,000 |
21,000 |
21,000 |
Closing stock |
4,000 |
3,000 |
3,000 |
Selling price = total cost of production + 25%
= 72 + 18 = 90
Using full costing:
Particular |
April |
May |
June |
Total |
Sales revenue x90 |
1,800,000 |
1,890,000 |
1,890,000 |
5,580,000 |
Total cost of sales |
|
|
|
|
Opening stock |
432,000 |
288,000 |
216,000 |
432,000 |
Production in month |
|
|
|
|
Direct material x27 |
486,000 |
540,000 |
567,000 |
1,593,000 |
Direct labour x22 |
396,000 |
440,000 |
462,000 |
1,298,000 |
Variable OH x9 |
162,000 |
180,000 |
189,000 |
531,000 |
Fixed OH x14 |
252,000 |
280,000 |
294,000 |
826,000 |
Total cost of production |
1,728,000 |
1,728,000 |
1,728,000 |
4,680,000 |
Closing stock |
288,000 |
216,000 |
216,000 |
216,000 |
Cost of production of sales |
1,440,000 |
1,512,000 |
1,512,000 |
4,464,000 |
Profit before adjustment |
360,000 |
378,000 |
378,000 |
1,116,000 |
Under/over absorption |
(28,000) |
0 |
14,000 |
(14,000) |
Profit after adjustment |
332,000 |
378,000 |
392,000 |
1,102,000 |
Using marginal costing
Particular |
April |
May |
June |
Total |
Sales revenue |
1,800,000 |
1,890,000 |
1,890,000 |
5,580,000 |
Total cost of sales |
|
|
|
|
Opening stock |
348,000 |
232,000 |
174,000 |
348,000 |
Production in month |
|
|
|
|
Direct material x27 |
486,000 |
540,000 |
567,000 |
1,593,000 |
Direct labour x22 |
396,000 |
440,000 |
462,000 |
1,298,000 |
Variable OH x9 |
162,000 |
180,000 |
189,000 |
531,000 |
Total variable cost |
1,392,000 |
1,392,000 |
1,392,000 |
3,770,000 |
Closing stock |
232,000 |
174,000 |
174,000 |
174,000 |
Variable Cost of production of sales |
1,160,000 |
1,218,000 |
1,218,000 |
3,596,000 |
Contribution |
640,000 |
672,000 |
672,000 |
1,984,000 |
Fixed cost |
280,000 |
280,000 |
280,000 |
840,000 |
Profit |
360,000 |
392,000 |
392,000 |
1,144,000 |
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)