Question

Alpha Hospital (‘Alpha’), a 500-bed private hospital in Country X, provides medical services to the elderly. In addition to meeting the special needs of the elders who are physically weak, Alpha offers the centre-based and home-based community care services. In recent years, Alpha faces keen competition from other public and private hospitals, local elderly centres and nursing homes. Alpha needs to get a reasonable estimate of the cost of elderly care services for proper control purposes. Christine, financial controller of Alpha, would conduct a study to examine the feasibility of using activity-based costing (ABC) to provide a reasonably estimate of the actual costs. After Christine carefully reviews the existing Alpha’s operations, she identifies the following divisions:

a. Outpatient services: the 24-hour outpatient clinic offers general outpatient services by a dedicated team of veteran general practice and emergence medicine specialists.

b. Investigative services: Alpha operates many investigative and diagnostic services, such as radiology and pathology. Furthermore, this division provides counselling and elder support services.

c. Community services: a number of agency and district-based home service providers collaborate with this division for outreach activities and make referrals to Alpha.

d. Elderly care services: a group of medical doctors, nurses and social workers provide a comprehensive range of social service, including health talks, elderly learning course, and community programs for pursuing physical and mental health

Apart from the above divisions, the customer service department is responsible for the admission of new patients and issues bills (and invoices) to the patients. At the same time, human resources, and finance and accounting departments provide supporting service to all divisions

As Christine knows that you are the consultant of ABC, she asks you to help her to design an ABC system for Alpha.

1) Explain the concepts which you learn in the activity analysis and two-stage ABC system. Explain how the ABC can be implemented in Alpha.

2) Identify FIVE activities and their related cost drivers in Alpha. Explain the nature of indirect resources costs to be allocated.

Answer 1

Answer 1

Activity Based Costing(ABC)

In this method, a separate absorption rate is created for each component of cost ie separate absorption rate for each activity in the organization. Different bases s used for absorption rate of each activity.

Stage 1: Allocation to Activities

The first step in Activity-Based Costing is to divide the expenses of certain overhead activities to a per-event.

Stage 2: Allocation to Production

The second step in activity-based costing is to allocate the activity cost to each product.

In Alpha currently following divisions

Outpatient services

Investigative services

. Community services

Elderly care services

So the company need to allocate cost to separate department by using cost drivers.

Answer 2

Type of Activities Cost drivers

Nursing service                    Minutes used

Doctors   service                 Minutes used

Laboratory supervisor service Number of patients

Supervisory Cost                     Number of workers supervised

Material ordering cost         Number of Orders

Rent      cost                                   Floor Space

Electricity cost                   Number of plug points

health talks,                      Number of attendance