A-C given the info from 5.3 5.3 Medical Clinic has traditionally allocated its o

Question

A-C given the info from 5.3

5.3 Medical Clinic has traditionally allocated its overhead using patient visits. The clinic is considering dropping its OB/GYN services or cutting the salary of these employees since the segment has lost money for several years. Their accounting intern suggests using activity based accounting for the next year before making a decision. To follow are the estimated overhead costs, cost pools, and usage rates for the upcoming year. Shared Cost Pools Billing & reception Building costs Common Equipment Administration Total estimated overhead Overhead Cost Cost Driver $324,000 Patient Visits $240,000 Square feet used $210,000 Tests/Scans S90.000 Employees $864,000 Radiology OB/GYN Surgery Patient visits Square feet used Tests/Scans Employees 500 1,600 270 900 1,800 185 4 400 1400 145 Radiology $850,000 OB/GYN Surgery $940,000 $700,000 $170,000 $85,000 $115,000 $310,000 $%460,000 $330,000 Departmental equipment costs $85,000 $20,000 $15,000 Estimates By Department Revenue Direct materials costs Direct labor costs A. Traditionally overhead is allocated using the number of patient visits. Calculate the overhead applied to each department using this method. B. Use activity based costing to determine the total overhead applied to each department C. Determine the total profit by department using the traditional method and the ABC method

Explanation / Answer

Req A: Total overheads 864000 Divide: Total Number of Patients visit 1800 OH rate per visit 480 Radiology OB/ GYN SURGERY Patients visit 500 900 400 OH rate per visit 480 480 480 OH allocated 240000 432000 192000 Req B: Activity rate: Activity    Driver Cost Total Driver Activity rate Billing and reception Visits 324000 1800 180 Building cost Sq. feet 240000 4800 50 Common Equipment Test/Scans 210000 600 350 Admin Employes 90000 9 10000 Overheads allocated Activity Rate Radiology OB/ GYN Surgery Activity OH cost Activity OH cost Activity OH cost Billing and reception 180 500 90000 900 162000 400 72000 Building cost 50 1600 80000 1800 90000 1400 70000 Common Equipment 350 270 94500 185 64750 145 50750 Admin 10000 2 20000 4 40000 3 30000 Total Overheads 284500 356750 222750 Req C: Profits under Traditional Method: Radiology OB/GYN Surgery Total Revenue 850000 940000 700000 2490000 Less: Cost Material 170000 85000 115000 370000 labour 310000 460000 330000 1100000 Overheads 240000 432000 192000 864000 Equipment cost 85000 20000 15000 120000 Total profits 45000 -57000 48000 36000 Profits under ABC: Radiology OB/GYN Surgery Total Revenue 850000 940000 700000 2490000 Less: Cost Material 170000 85000 115000 370000 labour 310000 460000 330000 1100000 Overheads 284500 356750 222750 864000 Equipment cost 85000 20000 15000 120000 Total profits 500 18250 17250 36000

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