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The analysis of nursing and machine operator resources is given in Exhibit 3. The new allocation of service expenses drastically changes the profits incurred by the two treatments. Under the revised cost estimates, HD is allocated $466,610 for general overheads, $116,489 for durable equipment use and $661,966 for nursing services, a total of $1,245,065 as service costs.
This reduces the net income of HD treatments to $3,923 from $131,525 under the ratio-of-cost-to charge system. On the other hand, the net income for PD treatments has increased from $93,504 under the old system to $221,106 under ABC system. The cost allocations are as follows: $319,215 for general overheads, $20,557 as durable equipment use and $221,314 for nursing services, a total of $561,086 as service costs. Analysis of newly produced information
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David Thomas allocated the general overheads and nursing services costs on basis of the use of these cost pools by the two treatments and not just the percentage contribution of each treatment in total revenues. However, this analysis can be improved by deriving resource pools for the durable equipment costs, like depreciation, maintenance etc, then finding the cost drivers for each pool of resources to see how that resource is used by the two treatments. Then the total durable equipment costs should be allocated to each treatment on basis of their total use of the durable equipment resource pools. This will give an idea of the actual utilization of these resources by the two treatments. Therefore, instead of allocating 85% of durable equipment costs to HD and 15% to PD, ABC analysis should be applied to allocate durable equipment …show more content…
ABC analysis is an effective tool in deriving the proper cost allocations to aid managers in making important decisions such as providing or eliminating alternative procedures or delivery method. Incorrect costing procedures can lead to misleading results that in turn affects managerial decisions and therefore in order to help managers make right decisions and improve the long-term profitability of the health care unit, it is important that new and improved costing techniques are used.
Pluszz
Answer all four requirements of the case study. In addition to these requirements you are recommended to exhibit your ability to:
1) Critically evaluate the advantages and drawbacks of traditional costing systems.
2) Compare activity-based costing systems to traditional costing systems.
3) Analyze the circumstances and provide arguments with solid numbered reasoning to support appropriateness of any of the two systems.
4) Foresee and critically assess the implications of moving from one system to another.
Table 1
Clinic income statement Total HD PD
Revenues
Number of patients 164 102 62
Number of treatments 34 967 14 343 20
This reduces the net income of HD treatments to $3,923 from $131,525 under the ratio-of-cost-to charge system. On the other hand, the net income for PD treatments has increased from $93,504 under the old system to $221,106 under ABC system. The cost allocations are as follows: $319,215 for general overheads, $20,557 as durable equipment use and $221,314 for nursing services, a total of $561,086 as service costs. Analysis of newly produced information
[pic]1st visit to Coursework.info? …show more content…
David Thomas allocated the general overheads and nursing services costs on basis of the use of these cost pools by the two treatments and not just the percentage contribution of each treatment in total revenues. However, this analysis can be improved by deriving resource pools for the durable equipment costs, like depreciation, maintenance etc, then finding the cost drivers for each pool of resources to see how that resource is used by the two treatments. Then the total durable equipment costs should be allocated to each treatment on basis of their total use of the durable equipment resource pools. This will give an idea of the actual utilization of these resources by the two treatments. Therefore, instead of allocating 85% of durable equipment costs to HD and 15% to PD, ABC analysis should be applied to allocate durable equipment …show more content…
ABC analysis is an effective tool in deriving the proper cost allocations to aid managers in making important decisions such as providing or eliminating alternative procedures or delivery method. Incorrect costing procedures can lead to misleading results that in turn affects managerial decisions and therefore in order to help managers make right decisions and improve the long-term profitability of the health care unit, it is important that new and improved costing techniques are used.
Pluszz
Answer all four requirements of the case study. In addition to these requirements you are recommended to exhibit your ability to:
1) Critically evaluate the advantages and drawbacks of traditional costing systems.
2) Compare activity-based costing systems to traditional costing systems.
3) Analyze the circumstances and provide arguments with solid numbered reasoning to support appropriateness of any of the two systems.
4) Foresee and critically assess the implications of moving from one system to another.
Table 1
Clinic income statement Total HD PD
Revenues
Number of patients 164 102 62
Number of treatments 34 967 14 343 20