Chapter 18, Problem 18.6APR

Product costing and decision analysis for a service company

Pleasant Slay Medical Inc. wishes to determine its product costs. Pleasant Stay offers a variety of medical procedures (operations) that are considered its “products.” The overhead has been separated into three major activities. The annual estimated activity costs and activity bases follow:

Activity	Budgeted Activity Cost	Activity Base
Scheduling and admitting	$ 432,000	Number of patients
Housekeeping	4,212,000	Number of patient days
Nursing	5,376,000	Weighted care unit
Total costs	$10,020,000

Total “patient days” are determined by multiplying the number of patients by the average length of stay in the hospital. A weighted care unit (wcu) is a measure of nursing effort used to care for patients. There were 192,000 weighted care units estimated for the year. In addition, Pleasant Stay estimated 6,000 patients and 27,000 patient days for the year. (The average patient is expected to have a a little more than a four-day stay in the hospital.)

During a portion of the year, Pleasant Stay collected patient information for three selected procedures, as follows:

Activity-Base Usage
Procedure A
Number of patients	280
Average length of stay	× 6 days
Patient days	1,680
Weighted care units	1,200
Procedure B
Number of patients	650
Average length of stay	× 5 days
Patient days	3,250
Weighted care units	6,000
Procedure C
Number of patients	1,200
Average length of stay	× 4 days
Patient days	4,800
Weighted care units	24,000

Private insurance reimburses the hospital for these activities at a fixed daily rate of $406 per patient day for all three procedures.

Instructions

1. 1. Determine the activity rates.
2. 2. Determine the activity cost for each procedure.
3. 3. Determine the excess or deficiency of reimbursements to activity cost.
4. 4. Interpret your results.