Homework Assignment

Example 6A: Direct and Indirect Costs

Review the chapter text regarding direct and indirect costs. In particular, review the example of ambulance direct costs (Exhibit 6–1) and indirect costs (Exhibit 6–2). Remember that indirect costs are shared and are sometimes called joint costs or common costs. Because such costs are shared they must be allocated. Also, remember that one test of a direct cost is to ask: “If the operating unit (such as a department) did not exist, would this cost not be in existence?”

Practice Exercise 6–I: Identifying Direct and Indirect Costs

Make a worksheet with two columns: Direct Cost and Indirect Cost. Place each of the following items in the appropriate column:

• • Managed care marketing expense
• • Real estate taxes
• • Liability insurance
• • Clinic telephone expense
• • Utilities (for the entire facility)
• • Emergency room medical supplies

Assignment Exercise 6–1: Allocating Indirect Costs

Study Table 6–1, Table 6–2, and review the chapter text describing how the indirect cost is allocated. This assignment will change the allocation bases input for (A) Number of Visits (Volume), (B) Proportion of Direct Costs, and (C) Number of Computers in Service.

Required

• 1. Compute the costs allocated to cost centers “Clerical Salaries,” “Administrative Salaries,” and “Computer Services” using the new allocation bases shown below. Use worksheet #1 that replicates the set up in Table 6–2. Total the new results. The new allocation bases are:
  • A = # Visits (Volume): PT = 9,600/OT = 4,000/ST = 2,400/Total = 16,000 (16,000 × $3.50 = $56,000)
  • B = Proportion of Direct Costs: PT = 60%/OT = 25%/ST = 15%/Total = 100% (% × $55,000)
  • C = # Computers in Service: PT = 10/OT = 3/ST = 3/Total = 16 (16 × $5,000 each = $80,000).
• 2. Using worksheet #2 that replicates the set up in Table 6–1, enter the new direct cost and the new totals for indirect costs resulting from your work. Total the new results.

Practice Exercise 6–II: Responsibility Centers

The Metropolis Health System has one director who supervises the areas of Security, Communications, and Ambulance Services. This director also supervises the medical records relevant to Ambulance Services, the educational training for Security and Ambulance Services personnel, and the human resources for Security, Communications, and Ambulance Services personnel.

Required

Of the duties and services described, all of which are supervised by one director, which areas should be responsibility centers and which areas should be support centers? Draw them in a visual and indicate the reporting requirements.

Assignment Exercise 6–2: Responsibility Centers

Choose among the Case Study in Chapter 27, the clinic in Mini-Case Study 2, or the Metropolis Health System information as contained in its Case Study and the Appendix that contains its financial statements. Designate the responsibility centers and the support centers for the organization selected. Prepare a rationale for the structure you have designed.

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