Study 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.
Required 1. 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 Centers The 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. Required Of 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 Centers Choose 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 7 Example 7A: Fixed, Variable, and Semivariable Distinction Review 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 Costs The 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. Required Using the monthly utilization information presented below, find the fixed and variable portion of costs through the high–low method. Month Number of Training Packs Cost January 1,000 $6,200 February 200 1,820 March 250 2,350 April 400 3,440 May 700 4,900 June 300 2,730 July 150 1,470 August 100 1,010 September 1,100 7,150 October 300 2,850 November 250 2,300 December 100 1,010
Assignment Exercise 7–1: Analyzing Mixed Costs The 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.
1. 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? Month Total Number of Training Packs Total Cost Community College Number Packs Community College Cost January 1,000 $6,200 200 $1,240 February 200 1,820 March 250 2,350 April 400 3,440 May 700 4,900 300 2,100 June 300 2,730 July 150 1,470 August 100 1,010 September 1,100 7,150 300 1,950 October 300 2,850 November 250 2,300 December 100 1,010
Example 7B: Contribution Margin Computation 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: Amount Revenue $1,260,000 Less Variable Cost (600,822) Contribution Margin $659,178 Thus, $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 Margin Greenside 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. Required Compute the contribution margin for Greenside Clinic. Assignment Exercise 7–2: Calculating the Contribution Margin The 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. Required 1. Compute the contribution margin for the Community Center Mental Health Program. 2. What does the result tell you about the program?