Cost Accounting

Prof. Ranjan DasGupta

Cost Accounting (IIM Raipur AY 2023-24) - Prof. Ranjan

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DasGupta
 Problem 4: ABC, Health Care
Max Health Centre runs three programs: alcoholic rehabilitation; drug
addict rehabilitation; and aftercare (counselling and support of patients
after release from a mental hospital).
The Centre’s budget for current year follows:
Professional salaries
4 physicians @Rs.6,00,000 Rs.24,00,000
18 psychologists
@Rs.3,00,000 54,00,000
20 nurses @Rs.1,20,000 24,00,000
Rs.1,02,00,000
Medical supplies Rs.6,00,000
General overhead (admin. Rs.17,60,000
salaries, rent, utilities, etc.)
TotalCost Accounting (IIM Raipur AY 2023-24) - Prof. Ranjan Rs.1,25,60,000
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 Problem 4: ABC, Health Care
Amitabh, the Director of the Centre, is keen on determining the cost of
each program. Amitabh compiled the following data describing employee
allocations to individual programs:
Professionals Alcohol Drug Aftercare Total
Employees
Physicians 4 4
Psychologists 6 4 8 18
Nurses 4 6 10 20

Eighty patients are in residence in the alcohol program, each staying about
6 months. Thus, the clinic provides 40 patient-years of service in the
alcohol program. Similarly, 100 patients are involved in the drug program
for about 6 months each. Thus, the clinic provides 50 patient-years of
service in the drug program.
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Cost Accounting (IIM Raipur AY 2023-24) - Prof. Ranjan
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 Problem 4: ABC, Health Care
Amitabh has recently become aware of activity-based costing (ABC) as a
method to refine costing systems. He asks his accountant, Suresh, how he
should apply this new technique. Suresh obtains the following
information:
1. Consumption of medical supplies depends on the number of patient-
years.
2. General overhead costs consist of:
Rent and clinic maintenance – Rs.3,60,000
Administrative costs to manage patient charts, food, laundry –
Rs.12,00,000
Laboratory services – Rs.2,00,000
Total – Rs.17,60,000
3. Other information about individual departments:
Cost Accounting (IIM Raipur AY 2023-24) - Prof. Ranjan
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 Problem 4: ABC, Health Care (126)
Cost-drivers Alcohol Drug Aftercare Total
Square feet of space occupied by 9,000 9,000 12,000 30,000
each program
Patient-years of service 40 50 60 150
Number of laboratory tests 400 1,400 700 2,500

1. a. Select cost-allocation bases that you believe are the most appropriate
for allocating indirect costs to programs. Calculate the indirect-cost
rates for medical supplies, rent and clinic maintenance, administrative
costs for patient charts, food and laundry, and laboratory services.
1. b. Using an ABC approach to cost analysis, calculate the cost of each
program and the cost per patient-year of the alcohol and drug programs.
1. c. What benefits can Max Health Centre obtain by implementing the
ABC system? Cost Accounting (IIM Raipur AY 2023-24) - Prof. Ranjan
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 Problem 4: ABC, Health Care (126)
2. What factors, other than cost, do you think Max Health Centre should
consider in allocating resources to its programs?

Cost Accounting (IIM Raipur AY 2023-24) - Prof. Ranjan

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DasGupta
 Problem 7: ABC in Manufacturing (107)
Zuari produces two types of doors, interior and exterior. The company’s
simple costing system has two direct cost categories (materials and
labour) and one indirect cost pool. The simple costing system allocates
indirect costs on the basis of machine hours. Recently, the owners of Zuari
have been concerned about a decline in the market share for their interior
doors, usually their biggest seller. Information related to Zuari production
for the most recent year follows:
Particulars Interior Exterior Particulars Interior Exterior
Units sold 3,200 1,800 Production runs 40 85
Selling price Rs.1,250 Rs.2000 Material moves 72 168
Direct material cost per unit Rs.300 Rs.450 Machine setups 45 155
Direct manufacturing labor Rs.160 Rs.160 Machine-hours 5,500 4,500
cost per hour
Direct manufacturing 1.5 2.25 Number of inspections 250 150
Cost Accounting (IIM Raipur AY 2023-24) - Prof. Ranjan
labour-hours
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 Problem 7: ABC in Manufacturing (107)
The owners have heard of other companies in the industry that are now
using an activity-based costing system and are curious how an ABC
system would affect their product costing decisions. After analyzing the
indirect cost pool for Zuari, six activities were identified as generating
indirect costs: production scheduling, material handling, machine setup,
assembly, inspection, and marketing. Zuari collected the following data
related to the indirect cost activities:
Activity Activity Cost Activity Cost Driver
Production scheduling Rs.9,50,000 Production runs
Material handling Rs.4,50,000 Material moves
Machine setup Rs.2,50,000 Machine setups
Assembly Rs.6,00,000 Machine-hours
Inspection Rs.80,000 Number of inspections
Cost Accounting (IIM Raipur AY 2023-24) - Prof. Ranjan
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 Problem 7: ABC in Manufacturing (107)
Marketing costs were determined to be 3% of the sales revenue for each
type of door.
You are required to:
1. Calculate the cost of an interior door and an exterior door under the
existing simple costing system.
2. Calculate the cost of an interior door and an exterior door under an
activity-based costing system.
3. Compare the costs of the doors in requirements 1 and 2. Why do the
simple and activity-based costing systems differ in the cost of an interior
and exterior door?
4. How might Zuari use the new cost information from its activity-based
costing system to address the declining market share for interior doors?
Cost Accounting (IIM Raipur AY 2023-24) - Prof. Ranjan
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