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The Two Cost Systems sacred Heart Hospital (SHH) faces s two biggest nursing service lines-the E SHH’s current cost system assigns total of patients serviced by each line. Total hospital annual nursing costs forhsr expected to equal $300,000. The table below shows expected patient volume for both lirhte eting nursing costs, all of which relate to its Room (ER) and the Operating Room (OR). nursing costs to the ER and OR based on the number these two lines are Measure Number of patients (ER visits or OR surgeries) Number of vital signs checks Number of nursing hours Total 2,000 6,000 15,000 OR ER 1,000 2,000 4,000 1,000 10,000 5,000 Required: 1. Using the current cost system, calculate the hospital-wide rate based on number of patients Calculate the amount of nursing costs that the current cost system assigns to the ER and to the OR. 2. Using the results from Requirement 2, calculate the cost per OR nursing hour under the current cost system. 3. After discussion with several experienced nurses, jack Bauer (SHH’s accountant) d that assigning nursing costs to the two service lines based on the number of times that nurses must check patients’ vital signs might more closely match the underlying use of to developa second cost system that assigns total nursing costs to the ER and OR based on the number
Expert Answer
1. Current Cost System: Hospital Wide rate.
Blanket Rate:
The rate of absorption of cost which is fixed for the whole company is called blanket rate.
Absorption rate = Total budgeted cost / Total expected units of absorption
= $300,000 / 2,000 patients.
=$150 per patient.
Hospital wide rate = $ 150 per patient.
2. Amount of nursing cost assigned to ER and OR under Current Cost System:
| Particulars | ER | OR | Total |
| Number of patients | 1000 | 1000 | 2000 |
| Amount of nursing cost @ $150 per patient | 150,000 | 150,000 | 300,000 |
3. Cost per nursing hour in OR under Current cost system:
Hourly Rate = Total Absorbed cost / No of nursing hours.
= 150,000 / 5,000
= $30 per nursing hour in OR
Cost per nursing hour in OR under Current Cost System = $ 30
4. Vital – Sign Costing System:
The new cost system is Activity based costing system. In this cost system, the cost unit will be the activities performed.
Hospital Wide Rate = Total budgeted cost / No of units of absorption
= $300,000 / 6000 vital sign checks
= $50 per vital sign check.
Absorption rate under Vital sign Costing System = $50 per vital sign check.
5. Amount of nursing cost assigned to ER and OR under Vital sign costing system:
| Particulars | ER | OR | Total |
| Number of vital sign checks | 2000 | 4000 | 6000 |
| Amount of nursing cost @ $50 per vital sign check | 100,000 | 200,000 | 300000 |
