ACT 211: Chapter 10 Worksheet

Problem 1
Pleasant Stay Medical Inc. provides post operation care for a variety of medical procedures
(operations). Private insurance reimburses the hospital for its work at a fixed daily rate of $406
per patient day. The Company’s only truly variable cost is food which costs $20 per patient per
day. However, the company is barely breaking even. As such, Pleasant Stay is trying to
streamline its operations and wishes to determine the cost of its excess capacity.

The annual estimated overhead costs follow:

Front Desk Staff Salaries: $200,000

Scheduling software subscription fee: $50,000
Front Desk Supplies: $10,000
Phone Operator Salary: $40,000
Utilities: $500,000
Hospital Building Lease: $1,000,000
Cleaning Staff Salaries: $400,000
Laundry and supplies: $100,000
Malpractice Insurance on Nurses: $2,000,000
Nurses Salaries: $3,000,000
Nurses Supplies: $500,000

The hospital estimates that the 10% of the building space is used by the front desk and waiting
area and the remaining 90% is related to patient rooms. The hospital believes that it has three
main activities related to post surgical care:

Activity Activity Base

Scheduling and admitting Number of patients
Housekeeping and patient stays Number of patient days
Nursing Weighted care units

Total patient days are determined by multiplying the number of patients by the average length of
stay in the hospital. A weighted care unit is a measure of nursing effort used to care for patients.
Pleasant Stay Medical has the capacity to handle 100,000 weighted care units for the year. In
addition, Pleasant Stay has the capacity to treat 5,000 patients and 22,000 patient days for the
year.

Pleasant Stay has the following data related to its prior year of operations:

Number of Patients 4,260

Average Length of Stay 5 Days
Weighted Care Units 98,400

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a. Determine the total cost associated with each activity:

Scheduling and Admitting Total Cost: $86,433 per day

Variable Costs:
Food = (4,260 patients ) * ($20/per patient) = $85,200 per day

Overhead:
Front Desk Staff Salaries: $200,000
Scheduling software subscription fee: $50,000
Front Desk Supplies: $10,000
Phone Operator Salary: $40,000
Utilities: $500,000*10% $50,000
Hospital Building Lease: $1,000,000*10% $100,000
Total Annual Overhead = $450,000 per year
Total Daily Overhead = $450,000/365 days = $1,233 per day

VC + OH = $85,200 + $1,233 = $86,433

Housekeeping and Patient Stays Total Cost: $5,068 per day

Cleaning Staff Salaries: $400,000

Laundry and supplies: $100,000
Utilities: $500,000*90% $450,000
Hospital Building Lease: $1,000,000*90% $900,000
Total Annual Cost: $1,850,000 per year
Total cost per day = $1,850,000/365 days = $5,068 per day

Nursing Total Cost: $15,068 per day

Malpractice Insurance on Nurses: $2,000,000
Nurses Salaries: $3,000,000
Nurses Supplies: $500,000
Total Annual Cost: $5,500,000 per year
Total cost per day: $5,500,000 / 365 days = $15,068 per day

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b. Determine the allocation rates for each activity.

Allocation rate = total annual overhead / annual capacity

Scheduling and Admitting:

= $450,000 / 5,000 patients

= $90 per patient

Housekeeping and Patient Stays:

= $1,850,000 / 22,000 patient days
= $84 per patient day

Nursing:
= $5,500,000 / 100,000 wcu
= $55 per wcu

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c. Use the allocation rates to calculate the allocated overhead costs for each activity based
on the prior year of operations.

(Actual Output) * (Allocation rate per output)

Scheduling and Admitting:

(4,260 patients) * ($90 per patient) = $383,400

Overhead allocated to Scheduling and Admitting = $383,400

Housekeeping and Patient Stays:

Actual # Patient stays for year = 4,260 patients * avg 5 day stay = 21,300 days
(21,300 patient days) * ($84 per patient day) = $1,789,200
Overhead allocated to Housekeeping and Patient Stays = $1,789,200

Nursing:

(98,400 wcu) * ($55 per wcu) = $5,412,000

Overhead allocated to Nursing = $5,412,000

d. Estimate the cost of Pleasant Stay’s excess capacity (i.e., unallocated overhead costs) for
the prior year.

Total Overhead – Total Allocated = Excess Capacity ie unallocated overhead costs

Scheduling and Admitting:

$450,000 – $383,400 = $66,600
Unallocated overhead = $66,600

Housekeeping and Patient Stays:

$1,850,000 - $1,789,200 = $60,800

Unallocated overhead = $60,800

Nursing:
$5,500,000 – $5,412,000 = $88
Unallocated overhead = $88

Total Cost of Excess Capacity = $66,600 + $60,800 + $88

= $127,488

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Problem 2
A Banking Company has five ATMs spread throughout the city maintained by the ATM
department. The ATM department has five employees: a supervisor, a head cashier, two
associate cashiers and one maintenance personnel. The associate cashiers make daily trips to
each machine to collect and replenish cash and to replenish supplies, deposit tickets, and so forth.
Each machine contains a small computer that automatically summarizes and reports transactions
to the head cashier. The head cashier reconciles the activities of the two associate cashiers to the
computerized reports. The supervisor, who does not handle cash, reviews the reconciliation.
When an ATM’s computer, a customer, or a cashier reports a problem, the maintenance
employee and one cashier are dispatched immediately. The cashier removes all cash and
transaction records, and the maintenance employees repair the machine.

The associate cashiers spend all of their time making trips to the ATMs, either for routine trips or
maintenance trips. The associate cashiers have the capacity to make four daily trips each. They
work 5 days/week. This allows for 20 trips to each machine over the course of a month. Any
extra time is budgeted for maintenance. The maintenance employee spends all of her time on
maintenance related activities. She works 40 hours/week. The head cashier’s time is divided with
75% directly related to reconciling cash from daily trips to each machine and 25% related to
supervising cashiers on maintenance calls. The supervisor devotes 20% of the time to reconciling
cash from daily trips to each machine and 80% to equal supervision of each employee.

Relevant data from the last month (4 weeks) of operations is below:

Salaries
Supervisor 4,000
Head cashier 3,000
Other ($1800 each) 5,400
Lease and operating costs
Cashiers’ service vehicles 1,200
Maintenance service vehicle 1,400
Machine lease and utilities ($1500 each) 7,500

Machine Routine Trips
1 20
2 20
3 20
4 20
5 20
Total 100
Maintenance
Maintenance Trips Hours
1 5
2 17
3 15
7 30
8 25
21 92

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Based on this information, you have determined the following three main activities for operating
the ATMs:
 Activity 1: Routine trips and cash reconciliations
 Activity 2: Maintenance trips
 Activity 3: Maintenance work
a. Perform a stage 1 allocation to determine the cost of performing each activity.

Routine trips and cash reconciliations:

Requires:
Associate cashiers: 1,800*2 cashiers = $3,600
Head Cashier (75%): $3,000*75% = $2,250
Supervisor (20% + 40% for both associates): $4,000*60% = $2,400
Cashier Service Vehicle: $1,200

Total = $9,450

Maintenance trips:
Maintenance employee (50% of salary): $900
Head Cashier (25%): 3,000*25% = $750
Supervisor (40% of time for two employees): $4,000*40% = $1,600
Maintenance service vehicle: $1,400

Total = $4,650

Maintenance Work:
Maintenance employee (50% of salary): $900
Machine lease and utilities = $7,500

Total = $8,400

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b. Identify the cost driver of each activity and calculate the appropriate allocation rate.

Activity Cost driver

Routine trips and cash reconciliations # trips
Maintenance trips: # trips
Maintenance work: # hours

Allocation rate = total OH / total volume of cost driver

Routine trips and cash reconciliations:

Total = $9,450 / 100 routine trips = $94.50 per trip
Cost = $94.50 per trip

Maintenance trips:
Total = $4,650 / 21 maintenance trips = $221 per trip
Cost = $221 per trip

Maintenance Work:
Total = $8,400 / 92 hours = $91
Cost = $91 per hour of maintenance work

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c. Estimate the cost of servicing ATM #4.

ATM #4 = 20 routine trips + 7 maintenance trips + 30 labor hours

Routine trips = $94.50 per trip * 20 trips = $1,890

Maintenance trips = $221 per trip * 7 trips = $1,547
Labor = $91 per hour * 30 hours = $2,720

Total cost = $6,157