Department and activity-cost rates service sector. Raynham's ...

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Department and activity-cost rates service sector.
 
  Raynham's Radiology Center (RRC) performs X-rays, ultrasounds, computer tomography (CT) scans, and magnetic resonance imaging (MRI). RRC has developed a reputation as a top radiology center in the state. RRC has achieved this status because it constantly reexamines its processes and procedures. RRC has been using a single, facility-wide overhead allocation rate. The vice president of finance believes that RRC can make better process improvements
  if it uses more disaggregated cost information. She says, We have state-of-the-art medical imaging technology. Can't we have state-of-the-art accounting technology?
 
  RRC operates at capacity. The proposed allocation bases for overhead are:
 
  Required:
  1. Calculate the budgeted cost per service for X-rays, ultrasounds, CT scans, and MRI using direct technician labor costs as the allocation basis.
  2. Calculate the budgeted cost per service of X-rays, ultrasounds, CT scans, and MRI if RRC allocated overhead costs using activity-based costing.
  3. Explain how the disaggregation of information could be helpful to RRC's intention to continuously improve its services.

Question 2

The first step in analyzing a transaction is to determine what accounts are involved.
  Indicate whether the statement is true or false

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Answer to Question 1

1. Overhead costs = 20,000 + 250,000 + 252,500 + 151,100 = 673,600

=

X-rays Ultrasound CT scan MRI Total
Technician labor  62,000 101,000 155,000  103,000  421,000
Depreciation 42,240 256,000 424,960 876,800 1,600,000
Materials 22,600 16,400 23,600 31,500 94,100
Allocated overhead 99,200 161,600 248,000 164,800 673,600
Total budgeted costs 226,040 535,000 851,560 1,176,100 2,788,700
Budgeted number of procedures  3,842  4,352  2,924  2,482
Budgeted cost per service  58.83  122.93  291.23  473.85

 Allocated overhead = Budgeted overhead rate  Technician labor costs
= 1.60  Technician labor costs

2. Budgeted Information
X-rays Ultrasound CT scan MRI Total
Number of procedures 3,842 4,352 2,924 2,482 13,600
Cleaning minutes per procedure 5 5 15 35
Total cleaning minutes 19,210 21,760 43,860 86,870 171,700

Number of procedures 3,842 4,352 2,924 2,482 13,600
Minutes for each procedure 5 15 25 40
Total procedure minutes 19,210 65,280 73,100 99,280 256,870

Activity Budgeted Cost
(1) Cost Driver
(2) Units of
Cost Driver
(3) Activity Rate
(4) = (1)  (3)
Administration  20,000 Total number
of procedures 13,600 1.47059 per procedure
Maintenance 250,000 Total dollars
of depreciation 1,600,000 0.15625 per dollar of depreciation
Sanitation 252,500 Total cleaning
minutes 171,700 1.47059 per cleaning minute
Utilities 151,100 Total procedure
minutes 256,870 0.588235 per procedure minute

X-rays Ultrasound CT Scan MRI Total
Technician labor  62,000 101,000 155,000  103,000  421,000
Depreciation 42,240 256,000 424,960 876,800 1,600,000
Materials 22,600 16,400 23,600 31,500 94,100
Allocated activity costs:
Administration
(1.47059  3,842; 4,352; 2,924; 2,482) 5,650 6,400 4,300 3,650 20,000
Maintenance
0.15625  42,240; 256,000; 424,960; 876,800) 6,600 40,000 66,400 137,000 250,000
Sanitation
(1.47059  19,210; 21,760; 43,860; 86,870) 28,250 32,000 64,500 127,750 252,000
Utilities
(0.58862  19,210; 65,280; 73,100; 99,280) 11,300 38,400 43,000 58,400 151,100
Total budgeted cost 178,640 490,200 781,760 1,338,100 2,788,700
Budgeted number of procedures  3,842  4,352  2,924  2,482
Budgeted cost per service  46.50  112.64  267.36  539.12

3. Using the disaggregated activity-based costing data, managers can see that the MRI actually costs substantially more and x-rays, ultrasounds, and CT scans substantially less than the traditional system indicated. In particular, the MRI activity generates a lot of maintenance activity and sanitation activity. Managers should examine the use of these two activities to search for ways to reduce the activity consumption and ultimately its cost.

Answer to Question 2

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