problem 2 chapter 3

Product Costing Product Costing 1 Product Costing • • • • • • • • The Need for Product Costing Job-Order and Process Costing Process Costing Job-Order Costing Hybrid Approaches to Product Costing Standard Costing Systems Microcosting Product Costing and Computers Product Costing 2 The Need for Product Costing • Inside stakeholders need info on product costing for making decisions • Outside stakeholders are also interested in info on product costing Product Costing 3 Job-Order and Process Costing • Job-order costing vs Process costing ? Product Costing 4 Job-Order and Process Costing Job-order Costing Process Costing – measures separately the cost of producing the units for each job – is a system in which all units are produced within a given time period are assigned the same costs – Uses different amounts of labor, materials, and overhead for each job – Is widely used when all products consume exactly the same inputs Product Costing 5 Job-Order and Process Costing (continued) Table 3-1 Example of Process Costing for Surgical Patients $ Amount Cost Categories Total nursing and technician labor: 10 hours @ $24 Surgical supplies Overhead costs (depreciation, administration,et.) $240 2,260 500 Total costs Divided by number of patients $3,000 2 Cost per patient $1,500 Product Costing 6 Job-Order and Process Costing (continued) $ Amount Patient A Patient B Cost Categories Nursing and technician labor: 2 hours @ $20 8 hours @ $25 $40 $200 Surgical supplies 260 2,000 Overhead costs (depreciation, administration,et.) 250 250 $550 $2,450 Total costs Product Costing 7 Job-Order and Process Costing (continued) Table 3-3 Example of Process Costing for Laboratory Tests Cost Categories $ Amount Total technician labor: 1 hours @ $30 Laboratory supplies $30 6 Overhead costs (depreciation, administration,et.) 21 Total costs Dividied by number of tests $57 3 Cost per test $19 Product Costing 8 Job-Order and Process Costing (continued) $ Amount Patient A Patient B Patient B Cost Categories Nursing and technician labor: 19 minutes @ $0.50 /minute 21 minutes @ $0.50 /minute 20 minutes @ $0.50 /minute Laboratory supplies Overhead costs (depreciation, administration,et.) Total costs Product Costing $9.50 $10.50 2.00 2.00 $10.00 2.00 7.00 7.00 7.00 $18.50 $19.50 $19.00 9 Process Costing • Is excellent for assigning responsibility and evaluating the costs incurred in the department that produces homogeneous products/services Product Costing 10 Job-Order Costing • Tracks separately the cost of each job  a job cost sheet • The extreme model is treating each patient as a job  a patient cost sheet Product Costing 11 Job-Order Costing Exhibit 3-1 Patient Cost Sheet Patient Cost Sheet Patient Number Admission Date A. Direct Supplies Date Item Description B. Direct Labor Date Employee Name/Title Item Code # Comments Quantity Hourly Rate Amount of Time Including Fringe ID # C. Ancillary Date Department Unit of Service D. Overhead Applied Date Department Overhead Basis Quantity Product Costing Unit Cost Amount Amount Unit Cost Amount Overhead Rate Amount 12 Process Costing vs. Job-Order Costing Table 3-5 Advantages of Process and Job-Order Costing Advantage More detailed information More accurate information Less expensive system Less burdensome to maitain Usefulness for responsibility accounting Better for decision making Less potential employeee resistance Product Costing Process Job-Order Costing Costing X X X X X X X X 13 Process Costing vs. Job-Order Costing (continued) Table 3-6 Comparison of Process and Job-Order Costing Process Job-Order Labor Averaged Specific Cost Materials Averaged Specific Product Costing Overhead Averaged Averaged 14 Hybrid Approaches to Product Costing • Managers must decide as to how much average they are willing to tolerate or how much they are willing to pay for more specific costing Product Costing Job-Order Costing Hybrid Costing Product Costing Process Costing 15 Standard Costing Systems • Standard costs are predetermined estimates of what is expected to cost • Standard costs are determined by using historical results, time-and-motion observations, or theoretical calculations Product Costing 16 Standard Costing Systems (continued) Table 3-7 Standard Cost Card for Chest X-Ray $ Amount Cost Categories Direct Labor Technician: 18 minutes @ $30 / hour $9.00 Direct Materials Film 25.00 Department indirect costs Variable costs per X-ray Fixed costs: $60,000 divided by 20,000 expected X-rays Allocated overhead costs from other departments $100,000 divided by 20,000 expected X-rays Total 4.00 3.00 5.00 $46.00 Product Costing 17 Table 3-8 Cleverley Standard Costing Method-Standard Treatment Protocol, Patient Type A, Department 1 SUs Service Unit 15 28 43 Quantity 2 1 5 Standard Cost Profile ($) Direct labor Direct materials Department 1 indirect costs Variable Fixed Allocated cost from other departments Variable Fixed Extended Cost ($) 23.20 46.40 11.20 22.40 5.24 7.40 10.48 14.80 9.25 4.20 18.50 8.40 Direct labor Direct materials Department 1 indirect costs Variable Fixed Allocated cost from other departments Variable Fixed 41.20 21.90 41.20 21.90 6.45 12.10 6.45 12.10 12.25 7.50 12.25 7.50 Direct labor Direct materials Department 1 indirect costs Variable Fixed Allocated cost from other departments Variable Fixed 5.00 4.50 25.00 22.50 3.00 2.50 15.00 12.50 10.00 2.00 50.00 10.00 Product Costing 18 Table 3-9 Standard Cost Card for Department 1, SU 43 Table 3-9 Standard Cost Card for Department 1, SU 43 Cost Categories Direct labor 20 minutes @ Direct materials Reagents Other direct supplies Total materials $ Amount $15 /hour $5.00 $3.00 1.50 Department 1 indirect costs Variable (labor, supplies, other) Fixed (supervisors, clerks, depreciation, supplies, seminars, dues, publications, etc.) $125,000.00 Divided by expected volume 50,000.00 Allocated cost from other departments Variable Fixed Divided by expected volume Total cost per unit $100,000.00 50,000.00 4.50 3.00 2.50 10.00 2.00 $27.00 Product Costing 19 Microcosting • Is the process of closely examining the actual resources consumed by a particular patient or service • Tends to be extremely costly and is generally done only for special studies Product Costing 20 Product Costing and Computers • Adopting bedside or portable hand-held computers to enable immediate entry into an electronic medical record, immediate access to patient lab work, and patient-specific resource use • Scanning clinicians’ identification card into the computer to record time of entry and exit from specific room • However, these devices and associated efforts are still costly endeavors Product Costing 21 Assignment • Problem 2 on page 48 Product Costing 22 Finkler Chapter 3, Problem 2 Chapter 3, Problem 2, page 48 Patient volume Number of X-ray per pt Number of X-ray treated Stationary % Portable % Orthopedic Cardiology – 0% 100% 8 – 90% 10% Stationary Variable costs X-ray film Developing chemicals Volume Total variable cost Fixed costs Technician salary for stationary X-ray Number of technician 6 for portable X-ray Number of technician 8 Oncology 4 – 85% 15% Portable Total $ – $ – $ – $ – $ – $ – $ – $ – – $ – $ – $ $ – $ Maintenance cost Stationary X-ray Portable X-ray $ – Overhead $ – $ – $ – Total fixed costs $ – $ – $ – Total costs $ – $ – $ – Cost per unit 3 Total – Finkler Chapter 3, Problem 2 Chapter 3, Problem 2, page 48 Patient volume Number of X-ray per pt Number of X-ray treated Stationary % Portable % Orthopedic Cardiology – 0% 100% 8 – 90% 10% Stationary Variable costs X-ray film Developing chemicals Volume Total variable cost Fixed costs Technician salary for stationary X-ray Number of technician 6 for portable X-ray Number of technician 8 Oncology 4 – 85% 15% Portable Total $ – $ – $ – $ – $ – $ – $ – $ – – $ – $ – $ $ – $ Maintenance cost Stationary X-ray Portable X-ray $ – Overhead $ – $ – $ – Total fixed costs $ – $ – $ – Total costs $ – $ – $ – Cost per unit 3 Total – Cardiology Orthopedic Oncology Total Patient volume Number of X-ray per pt Number of X-ray treated 8 4 – 3 – – Stationary % 0% – 90% – 85% – Portable % 100% – 10% – 15% – Stationary Portable Total Variable costs X-ray film Developing chemicals $ Volume Total variable cost Fixed costs Technician salary for stationary X-ray Number of technician for portable X-ray Number of technician $ – $ – $ $ – $ $ – $ – 6 8 Maintenance cost Stationary X-ray Portable X-ray $ Overhead $ $ – $ – $ – $ $ – $ – $ – – – Chapter 3, Problem 2, page 48 Cost per unit Finkler Chapter 3, Problem 2 Total fixed costs $ – $ – $ – Total costs $ – $ – $ – The radiology department of Metro-North Hospital takes 37,000 X-rays each year. The X-rays are taken as part of the treatment protocols for patients from three revenue departments: 2,000 cardiology patients who require an average of 8 X-rays each; 4,500 orthopedic patients who each get an average of 4 X-rays during the course of their treatment; and 1,000 oncology patients who have three X-rays taken for cardiology patients require the use of portable equipment while only 10% of the orthopedic patient X-rays and 15% of the oncology patients’ X-rays use the portable equipment. On average, the number of X-rays that have to be taken does not vary between patients that use the stationary X-ray machines in the radiology laboratory and X-rays taken using the portable equipment. X-ray film costs $15 per exposure and developing chemicals cost $2.00 per image. Annual salaries are $30,000 per year for each of the six technicians who operate the stationary X-ray machines and $35,000 for each of the eight technicians who operate the portable X-ray equipment. Radiology has fixed overhead costs of $100,000 per year and spends $15,000 per year to maintain the stationary X-ray machines and $25,000 to maintain the portable units. a) Using process costing, what is the cost per X-ray? b) Using job-order costing, what is the cost per X-ray for the patients who have X-rays taken in the laboratory and those whose X-rays are taken using the portable equipment?

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