Eric decided to do some additional investigation to see if the costâtoâcharges ratio method of costing services was responsible. Eric pulled the current yearâs budgeted data from his files. He found the data presented below.
Support Departments Revenue Departments Administrative Laundry Janitorial Laboratory Nursing Overhead $ 20000 $ 75000 $ 50000 $ 43000 $ 150000 Employees 1 4 7 8 20 pounds of laundry 50 200 400 1000 4000 Square feet 1000 1200 500 5000 20000
Currently, Support department costs are allocated using the direct method.
Eric decided to compute the costs of three different lab tests using the costâtoâcharges ratio and then reâcompute them using a more direct method. By comparing the unit costs under each approach, he could evaluate the costâestimating ability of the costâtoâcharges ratio. The three tests selected for study were the blood count test (Test B), cholesterol test (Test C), and a chemical blood analysis (Test CB).
After careful observation of the three tests, Eric concluded that the consumption of the resources of the laboratory could be associated with the relative amount of time taken by each test. Based on the amount of time needed to perform each test, Eric developed relative value units (RVUs) and associated the consumption of materials and labor with these units. RVU is a common metric used in hospital accounting and measures the relative amount of time required to perform a procedure. Although the exact time to perform a particular test is not revealed, the relative measure for time for performing a set of distinct tests can be computed and is useful for intraâtest analysis. For example, a test with a RVU of three means that it will take three times as much resources (i.e., labor, materials, etc) than a test with a RVU of one. The RVUs for each test and the cost per RVU for materials and labor are given below:
Test RVUs Material Per RVU Labor per RVU B 1 $ 2.00 $ 2.00 C 2 $ 2.50 $ 2.00 CB 3 $ 1.00 $ 2.00
Eric also concluded that the pool of overhead costs collected within the laboratory should be applied using RVUs. (He was convinced that RVU was a good activity driver for overhead.) The laboratoryâs total expected level of RVUs for the year were 22,500. The laboratory usually performs an equal number of the three tests over a year. This year was no exception.
Eric also noted that the hospital usually priced its services so that revenues exceeded costs by a specified percentage. Based on the past total costs of the laboratory, this pricing strategy had led to the following fees for the three blood tests:
Test B Test C Test CB Fee charged $ 5.00 $ 19.33 $ 22.00
Required: (Please answer The last one (5Th Question step by step clearly) (please show the caluclations if using excel)
1) Allocate the costs of the support departments to the two revenue producing departments using the direct method.
2) Assume that the three blood tests are the only tests performed by the laboratory. Given the direction presented in the case, compute the cost â to â charges ratio (total cost of the laboratory divided by the total revenue of the laboratory) for the laboratory.
3) Using the cost â to â charges ration computed in Requirement 2, estimate the cost of each blood test.
4) Compute the cost of each blood test using the RVU approach.
5) Assume that Lambert has been requested by an HMO to bid on Test CB. Using a 5 percent markup, prepare the bid using the cost computed in Requirement 3. Repeat this exercise using the cost computed in Requirement 4. Finally, suppose that any firm with a bid of $20 or less would win the bid. Discuss the implication under both scenarios.
Eric decided to do some additional investigation to see if the costâtoâcharges ratio method of costing services was responsible. Eric pulled the current yearâs budgeted data from his files. He found the data presented below.
| Support Departments | Revenue Departments | ||||||
| Administrative | Laundry | Janitorial | Laboratory | Nursing | |||
| Overhead | $ 20000 | $ 75000 | $ 50000 | $ 43000 | $ 150000 | ||
| Employees | 1 | 4 | 7 | 8 | 20 | ||
| pounds of laundry | 50 | 200 | 400 | 1000 | 4000 | ||
| Square feet | 1000 | 1200 | 500 | 5000 | 20000 | ||
Currently, Support department costs are allocated using the direct method.
Eric decided to compute the costs of three different lab tests using the costâtoâcharges ratio and then reâcompute them using a more direct method. By comparing the unit costs under each approach, he could evaluate the costâestimating ability of the costâtoâcharges ratio. The three tests selected for study were the blood count test (Test B), cholesterol test (Test C), and a chemical blood analysis (Test CB).
After careful observation of the three tests, Eric concluded that the consumption of the resources of the laboratory could be associated with the relative amount of time taken by each test. Based on the amount of time needed to perform each test, Eric developed relative value units (RVUs) and associated the consumption of materials and labor with these units. RVU is a common metric used in hospital accounting and measures the relative amount of time required to perform a procedure. Although the exact time to perform a particular test is not revealed, the relative measure for time for performing a set of distinct tests can be computed and is useful for intraâtest analysis. For example, a test with a RVU of three means that it will take three times as much resources (i.e., labor, materials, etc) than a test with a RVU of one. The RVUs for each test and the cost per RVU for materials and labor are given below:
| Test | RVUs | Material Per RVU | Labor per RVU |
| B | 1 | $ 2.00 | $ 2.00 |
| C | 2 | $ 2.50 | $ 2.00 |
| CB | 3 | $ 1.00 | $ 2.00 |
Eric also concluded that the pool of overhead costs collected within the laboratory should be applied using RVUs. (He was convinced that RVU was a good activity driver for overhead.) The laboratoryâs total expected level of RVUs for the year were 22,500. The laboratory usually performs an equal number of the three tests over a year. This year was no exception.
Eric also noted that the hospital usually priced its services so that revenues exceeded costs by a specified percentage. Based on the past total costs of the laboratory, this pricing strategy had led to the following fees for the three blood tests:
| Test B | Test C | Test CB | |
| Fee charged | $ 5.00 | $ 19.33 | $ 22.00 |
Required: (Please answer The last one (5Th Question step by step clearly) (please show the caluclations if using excel)
1) Allocate the costs of the support departments to the two revenue producing departments using the direct method.
2) Assume that the three blood tests are the only tests performed by the laboratory. Given the direction presented in the case, compute the cost â to â charges ratio (total cost of the laboratory divided by the total revenue of the laboratory) for the laboratory.
3) Using the cost â to â charges ration computed in Requirement 2, estimate the cost of each blood test.
4) Compute the cost of each blood test using the RVU approach.
5) Assume that Lambert has been requested by an HMO to bid on Test CB. Using a 5 percent markup, prepare the bid using the cost computed in Requirement 3. Repeat this exercise using the cost computed in Requirement 4. Finally, suppose that any firm with a bid of $20 or less would win the bid. Discuss the implication under both scenarios.
