...(primary, supplemental, or recommended reading) • A contact name and phone number/e-mail address we can use to verify your employment as an instructor You will receive an e-mail containing access information after we have verified your instructor status. Thank you for your interest in this text and the accompanying instructor resources. Cases in Healthcare Finance Case Questions © Health Administration Press, 2010. Reproduction without permission is prohibited. CASE 4 QUESTIONS APPLE VALLEY FAMILY PRACTICE Cost Allocation Methods 1. Briefly describe the differences in the four allocation methods discussed in the case. (Hint: Don’t discuss the mathematics of the schemes, but rather how they differ conceptually.) Which of the four methods is conceptually the most reasonable? 2. What are the allocations to each patient services department, and resulting profitability, under the four allocation methods using the base case cost amounts (Exhibit 4.1) and allocation rates (Exhibit 4.2)? 3. Now consider the sensitivity of the results to changes in the...
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...Introduction Gibson Insurance Company is faced with a challenge that is critical to the long-run sustainability of the company: how to use costing systems to operate more efficiently. With the growing size of the company in the recent years, the current cost allocation system is no longer suitable to provide vital information for the management in making pricing decisions, compensating employees, and managing costs. Therefore, it is essential that a new cost allocation system must be implemented to better measure the costs and gain insights to guide managerial decisions which can affect the organization’s efficiency. By evaluating Gibson’s current business practices and product lines, the report will identify issues and provide a rationale to utilize a new cost allocation system in order to increase efficiency and profitability. Company Background Gibson Insurance sells two different types of financial products: annuities and life insurance. Annuities are typically financial contracts that offer a re-occurring payment plan. Annuities consist of tax-deferred investments; this means that investors can place their pre-tax dollar income into various financial tools in order to decrease their income. The main goal of tax-deferred investments is to lower an individual’s income for an overall tax savings. Another product is a life insurance in which the policy holders contribute a certain amount of money per year in order to pay a lump sum to any benefactors if the policy holder...
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...product costs and profitability for the Salewa Case. We start with a description of assumptions and methods that are used for the calculations. To calculate the amount of costs each product should be carrying based on traditional absorption costing we first started with calculating the fifth years sales for each product. In order to obtain these we summed up all quarterly sales of the products. Total revenues per product are now easily calculated by multiplying the amount of products for each product with the selling price. We now have total revenues per product which we can use later for performing the profitability analysis of the firm. Under a traditional absorption cost system the costs are allocated to the products by determining direct costs and an allocation base for determining how to allocate overhead costs for each product. In the case of Salewa there are two direct costs, direct labor and direct materials. The allocation base for allocating the overhead will be machine hours and direct labor hours. Cost per product = Cost of direct Materials + Cost of direct Labor + Allocated Overhead Direct materials To calculate the cost of direct materials we multiplied the total production per product with all the costs of direct materials per product and summed them up. Eventually we had for each of the four products the total amount of direct material cost. Direct Labor To calculate the total direct labor costs we first started with calculating the cost for high...
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...the differences in the four allocation methods discussed in the case. From your standpoint, which of the four methods is conceptually the most reasonable? Why? Direct allocation: each support department costs are allocated directly to the service departments that use the services. The direct allocation method is relatively simple to apply. None of the costs of providing support services is allocated to other support departments. Only the direct costs of the support departments are allocated to the patient services departments because no indirect costs have been created by intrasupport department allocations. This method is the least costly of the four. Step down: this method is a compromise between the more simple direct allocation method and the complex reciprocal method. This method recognizes that intrasupport departments effects that the direct method ignores but it doesn’t recognize the full range of interdependencies. It is a sequential, stair step pattern of allocation. Step down allocation talks place in a specific sequence. After each allocation is made in this method, a support department is removed from the process. Double apportionment: a slightly more complicated version of the step down method. This method first recognizes support provided by service departments to all other service departments as well as to the patient service departments. That first step is called the first allocation/apportionment. Some costs still remain in the support...
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...Profitability Analysis Using Activity-Based Costing by Priscilla Wisner Executive Summary • • Traditional cost allocation methodologies in firms can provide misleading information about the profitability of products, product lines, customers, and markets. Activity-based costing (ABC) provides more meaningful information about the drivers of costs, the activities performed in a firm, and the relationship between costs and products, customers, markets, and segments. In addition to supplying more detailed and better cost and profitability information, an ABC analysis enables managers to evaluate processes from an activity viewpoint, leading to identification of non value-adding activities and process inefficiencies. ABC does not change overall profitability in a firm; it better aligns cost assignment to the causes of those costs. With better information, better decisions can be made in a firm to improve profitability—this is the power of ABC. • • • Introduction Cost allocation in firms can provide misleading information about the profitability of products, product lines, customers, and markets. Traditional cost allocation practices allocate all manufacturing overhead costs using a single driver such as direct labor hours, direct labor dollars, or machine hours. Sales-related costs are typically ignored. While technically accurate, in most complex organizations a single overhead cost driver is not sufficient to accurately assign the pool of overhead costs to the products...
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...activity based cost allocation and profitability (Kaplan, 2005). In the case presentation, John Malone, the General Manager of Dakota Office Products (DOP) commissioned analysis of the company’s operations and cost allocation practices; it focused on the company’s distribution center. Activities that emerged as cost drivers included: commercial freight shipping, personal delivery of orders under the Desktop Delivery program, warehouse handling and space, and several product ordering and entry activities. In this paper, the cost drivers were utilized to establish activity-based costing for DOP. Profitability for two current DOP customers was also analyzed for behavior patterns that might lead to or suggest improved pricing. Specific assignment questions were detailed and answered on the topic of relative profitability of the two customers. The objective of the analysis was to utilize learnings from the profitability calculations in order to make recommendations which would return DOP to profitable operation following the year of the unexpected loss. If the methods in this paper were utilized, it is felt to be a useful tool to assist DOP management in turning the company around. Method The assignment is summarized in this section, followed by a detail of steps taken to complete it. Data from the case study was used to develop an activity-based costing system. The activity-based costing system is shown in Table 1. Based on a 1 year history, relative profitability of two customers...
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...III. Two Stage Cost System Analysis The two stage method is always used in Activity-Based Costing, which assigns resource costs to cost objects base on separate activities. In stage one, the total overhead costs are allocated to the separate activities base on different resource drivers. In stage two, the costs of activities are allocated to each cost object base on cost drivers. In this case, because the wages and depreciation costs can be traced directly to each workstation, we only need to allocate the rent and other indirect costs to the five workstations. In stage two, we have to assign the overhead cost of each workstation to each job base on the labor hours that each job consumed. Table 1: Stage One: The total overhead allocation to different workstations Job Preparation Scanning Assembly Output Quality Control Idle Total Wages $ 8,000 $ 32,000 $ 64,000 $ 10,000 $ 11,000 $ 125,000 Depreciate 500 25,000 $ 10,000 14,000 500 50,000 Rent 2,000 2,000 8,000 4,000 1,000 13,000 30,000 Others 1,311.5 5,246 10,492 1,639 1,311.5 20,000 Total Overhead 11,811.5 64,246 92,492 29,639 13,811.5 13,000 225,000 Allocation rate $ 73.82 $ 100.38 $ 72.26 $ 148.20 $ 86.32 In table 1, we allocate the total overhead costs to different workstations. Because the labor hours of each workstation are available in this case, we can use the labor hours as the cost drive to assign the overhead of each workstation to each job. The overhead cost per labor hour is the rate that...
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...remaining 20,000 square feet. Due to recent growth, the OC needs 25% more space. As the OC needs a closer physical presence to all other departments in the hospital, it was decided that the full 100,000 square feet currently occupied by the OC and the DC should be solely dedicated to the OC and that the DC should relocate to a new 20,000 square foot facility to be constructed separate from the hospital building. In addition to the move, a change to the facilities cost allocation scheme has been proposed. Under the new cost allocation scheme, DC would no longer be profitable. Big Bend Medical Center must come with an alternative cost allocation structure to allow DC to be sustainable in long term while allowing the OC to expand its existing footprint. Question 1: Is it ”fair” for the Dialysis Center to suffer in profitability, and hence for the department head to possibly lose his bonus, just because the Outpatient Clinic needs additional space? If the proposed allocation method (under which the DC would bear the full cost to construct and relocate to the new 20,000 square foot facility) is used, then the answer is no. The DC did not request or need the new space; its relocation resulted from the need to accommodate the OC's growth. The bulk of the benefit from the DC relocating goes to the OC, which is expected to enjoy 25% higher revenues as a result of the expansion. Although the DC may recognize some benefits from its new space, such as greater convenience for...
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...Seyhun Shikhaliyev CASE STUDY COLORSCOPE 1. Why would any customer, let alone large advertising agencies and departmental stores, go to Colorscope rather than go to the large printers listed in Exhibit 3? The main line from the colorscope inc background are the corporate was found in march 1976, the first target customers is local customers (small agencies), and after that colorscope growth significantly that thing can be proved in 1988 sales colorscope over than USD 5 Milion and they served Big Customer, since growth they invest capital expenditure in order to improve services. In 1990 when the overall technology growth rapidly and there are more competitor than before, this situation make the condition under pressure, the first impact from this condition is price war, so the market pressure forced him to reduce his own price. After all finally in 1994 , colorscope loss signifant & long term client ( where the client omset is 80 % of his business). If colorscope want to survive in this business they must reevaluate the industry from the operation to his pricing policy. Direct Competitor 1. Larger, more technically savvy printing companies with professional salespeople pushing bundled pricing, integrating pre-press services with printing in a single package, such as R.R. Donnelley & Sons Co. and Quad Graphics. 2. Companies that competed in several different submarkets beyond catalogs, e.g. insert, comic syndications, and coupons, such as American Color and...
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... Patients, Private Insurance, Medi-Cal, Medi-Care. 2. What types of centers (departments) have budgets? Research & Development 1. How many cost centers are there? Can you give some examples? Research: Study Patients, Study Rx, Study Patient Physician Consultants 1. How important is it to control costs? CRITICAL 1. How are fixed costs separated from variable costs? Fixed costs are paid regularly on a monthly, quarterly or annual basis. Variable costs require approval. 1. How are variable costs handled? They are sent to the department manager for confirmation of order, receipt of items, and payment approval. 1. What method of cost allocation do you use in your organization (Direct allocation, step-down allocation, double or multiple distribution, or reciprocal)? What are the advantages and disadvantages of using that particular method? The method would be direct allocation. Income &...
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...To: Mr. Keener From: CC Subject: Recommendation about improving profitability Date: 10/07/2013 Dear Mr. Keener, After analyzing your current method of cost accounting, I was concerned that the costing system was not very accurate, and product costs might appear distorted under this method. Since current method used a division-wide allocation pool and used direct labor hours as an allocation base, you may overestimate or underestimate some costs and values. This method will mislead you about the cost and profitability of products, and is not efficient on cost analysis. As a manufacturing company, you should calculate allocation base of per department since you have a variety of departments and different types of equipment. You should also use multiple cost pools to determine costs. I would like to recommend you use this new system. Here are several advantages of the new method. The new system is likely to help with better cost control. Compared with calculating allocation base of direct labor hours in the old method, calculating allocation base of per department is more likely to reflect the real resources used in production. Therefore, the new method will generate more accurate results. In addition, the new method might impact product pricing, inventory valuation, and efficient allocation of work among departments. Managers can better determine the product pricing by using the new method. Besides, the new method would give a more accurate inventory valuation...
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...trading in secondary market. Metro Division sells Due bills to customer; Trust & Investment division involved in setting up Due bills accounts and in providing Data processing services. Finance division was responsible for Cost and profit allocation between divisions. There were two reasons led to conflict between Treasury division and Metro division: a) Inappropriate allocation of costs and profits between Treasury division and Metro division. It’s clear from Exhibit 4 below : Due bills T & I administrative expenses were completely charged to Metro division and there was no fee revenue share. Due to this Metro division was losing $26.50 with every T-Bill sale of ~$10000 with 180 day maturity period. As a result, Metro Division seen this product as loss making even though Due bills was significant contributor to Treasury division and overall company profit Margin. To increase division bottom line, Metro division proposed fee increase of $5 to an existing fee $25 dollars, ~70% fee revenue share of proposed fee (i.e. $20) and 50% of T&I expenses allocation to Treasury division. This was strongly opposed by Treasury division as they felt, increase in fee cost would result to reduction of customer base, Due bill transaction volume and fee and cost sharing would negatively impact their profits. b) Performance appraisal system followed in Metro and Treasury divisions was different. Treasury Group’s performance assessment and...
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...before taxes of -1.3% in the year 2000. This memo is in direct regards to the inadequacies of the existing cost allocation system and investigation of using an Activity Based Costing (ABC) method. Dakota Office Products utilizes a traditional cost allocation system. Direct and indirect costs associated with operations are allocated to sold goods. DOP offers a comprehensive product line in office supplies. Traditional cost systems used in such product diversity can cause cost distortions (Martin). Costs were allocated using the activity based costing method to determine where these distortions originate. Six activities were detailed and the ABC driver rate was calculated using the actual cost from the income statement and employee determined capacities (Appendix I). DOP has recently implemented a new convenience to customers with “desktop deliveries”. Warehouse personnel and a small fleet of trucks were assigned to complete the deliveries for the customer at only a 2% premium. When calculating the ABC cost rates, it was immediately evident that the desktop deliveries were a significant cost driver at $220/carton. This rate is more than four times any other cost driver rate. The driver rates were multiplied by the actual services provided, and a revised customer profitability report using the ABC method was generated (Appendix I). When using the existing cost allocation method, both Customer A and Customer B depict contributions over 6% to...
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...Solutions Manual COST ACCOUNTING Fifteenth Edition Charles T. Horngren Srikant M. Datar Madhav V. Rajan ------------------------------------------------- ------------------------------------------------- ------------------------------------------------- ------------------------------------------------- ------------------------------------------------- ------------------------------------------------- ------------------------------------------------- ------------------------------------------------- ------------------------------------------------- ------------------------------------------------- ------------------------------------------------- Acquisitions Editor: Ellen Geary ------------------------------------------------- Editorial Project Manager: Nicole Sam ------------------------------------------------- Editorial Assistant: Christine Donovan ------------------------------------------------- Project Manager: Roberta Sherman ------------------------------------------------- Supplements Project Manager: Andra Skaalrud ------------------------------------------------- Copyright © 2015 Pearson Education, Inc. All rights reserved. Manufactured in the United States of America. This publication is protected by Copyright, and permission should be obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying...
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...Question 2 Requirement 1 The correct way to ranking projects of Pernas Berhad in a capital rationing situation is by using profitability index. The reasons why they should use profitability index is because they have limited financial resources. Requirement 2 The first step to calculate the profitability index is by getting the net income from the all projects. The formula for net income is revenue – variable cost – fixed cost – depreciation. Project | Revenue (RM’millions) | Variable cost (RM’millions) | Fixed cost (RM’millions) | Depreciation(RM’millions) | Net income(RM’millions) | A | 14.320 | 5.012 | 2.500 | 4.250 | 2.558 | B | 18.575 | 7.430 | 4.000 | 3.125 | 4.020 | C | 9.750 | 2.438 | 1.500 | 3.750 | 2.062 | D | 13.000 | 2.600 | 6.000 | 1.550 | 2.850 | E | 5.250 | 1.313 | 1.500 | 1.017 | 1.420 | f | 10.000 | 1.500 | 4.200 | 1.250 | 3.050 | (Table 1) After we get the net income for the all projects, now we can calculate the operating cash flow for the all projects. The formula to get operating cash flow is Net income + Depreciation. Project | Net income (RM’millions) | Depreciation (RM’millions) | Operating cash flow (RM’millions) | A | 2.558 | 4.250 | 6.808 | B | 4.020 | 3.125 | 7.145 | C | 2.062 | 3.750 | 5.812 | D | 2.850 | 1.550 | 4.400 | E | 1.420 | 1.017 | 2.437 | F | 3.050 | 1.250 | 4.300 | (Table 2) After I have get the operating cash flow for the all projects, I can conclude that Project B has the highest operating...
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