Case Part B Now that you have calculated the costs associated with each profit c
ID: 2588006 • Letter: C
Question
Case Part B Now that you have calculated the costs associated with each profit center and each profit center's net income, you began to question the cost driver for Financial Services. As you reflected more deeply on the activities in that support department, you realized that most activities revolved around the issuance of invoices to patients. You asked for data on invoices generated by profit center and received the schedule reflected in Exhibit 6 below. Exhibit 6 Utilization of Financial Services Number of Bills Patient Services DepartmentRequired Routine Care Laboratory Radiology 3,200 60,300 36,500 Total bills 100.000 Re-calculate costs and net profit for each profit center based on this assumption. Did the most profitable profit center change? Does one of the profit centers now operate at a loss? If you were the Manager of the Imaging profit center and were incentivized based on profit, which of the two costing approaches would you prefer? Which do you prefer as Manager of the Primary Patient Care? Which of the approaches is the best approach and why?Explanation / Answer
Re-allocation of financial services costs :
Revised net income statement :
1. The most profitable profit center has not changed. Laboratory remains the most profitable.
2. No. None of the profit centers is operating at loss.
3. I would prefer the orginal costing approach as it gives a higher net income to the Imaging profit center.
4. I would prefer the second approach of costing as it gives a higher net income for the primary patient care center.
5. The first approach is the best way to allocate the support center costs, as the patient revenue is the final outcome of issuing invoices to patients. For laboratory and Imaging centrers, the individual biils may be for smaller amounts, and this may be the reason for higher number of invoices to these centers.
Since the final purpose of issuing invoces is to account for revenues, it would be better to allocate the Financial service center costs on the basis of patient revenue as done under the first cost allocation method.
Cost driver Allocation rate Primary patient care Labs Imaging Total Financial services Number of bills 3200 60300 36500 100000 Amount 15.0000 48000 904500 547500 1500000 Facilities Square feet 199800 39600 61200 300600 Amount 12.6414 2525749 500599 773653 3800000 House keeping Labor hours 76000 6000 9000 91000 Amount 17.5824 1336264 105495 158242 1600000 Administration Salary dollars 5709000 2035000 2439000 10183000 Amount 0.4321 2466817 879309 1053874 4400000 Personnel Salary dollars 5709000 2035000 2439000 10183000 Amount 0.2504 1429633 509599 610768 2550000 Total allocated costs 7806462 2899501 3144037 13850000