Southern Districts is a private hospital in Wangaratta, Victoria. The hospital is a not-for-profit organisation, and currently bills its patients at $375 per day. This rate was set at the beginning of the year to cover the costs of running the hospital, based on the expected level of activity. The costs at this activity level have been estimated at:
Medical staff.............................................$3,750,000
Nursing staff...............................................5,000,000
Overhead:
Patient records..............................................625,000
Radiology.................................................1,000,000
Kitchen....................................................1,500,000
Other overhead..........................................1,250,000
The expected level of activity in the hospital is measured in patient-days, and was estimated as follows:

It is expected that the medical and nursing staff will work 100,000 hours and 250,000 hours respectively during the year, and that their time will be spent as follows:

The billing system had been well accepted within the local community. However, one day, on being discharged from the Maternity Ward, a patient lodged a complaint over the fee. She claimed that as a maternity patient she should have been charged less than a surgical patient, as she required less care from both the medical and nursing staff. Also, unlike surgical patients, maternity patients rarely require radiology support or special meals from the kitchen. A subsequent review of the medical, nursing and support services required by patients in the Maternity and Surgical Wards substantiated her claims.
Required:
1. Construct an Excel' spreadsheet to:
(a) Show how the billing rate of $375 per patient-day was set.
(b) Estimate separate billing rates for each of the three wards, assuming that medical and nursing staff costs are allocated to the three wards using staff hours, and all other overhead costs are allocated using patient-days as the cost driver.
2. When the departmental billing rates are discussed at the next board meeting, the treasurer opposes them, claiming that they do not address all of the issues raised by the maternity patient. Do you agree? What is the problem?
3. Assume that the review indicates the following cost drivers should be used to allocate overhead costs to each ward:
Overhead cost Cost driver
Patient records.....................The number of patients
Radiology...........................Medical staff hours spent in the Surgical and General wards
Kitchen..............................Nursing staff hours
Other overhead.....................Nursing staff hours
Now use your Excels spreadsheet to estimate the billing rates for the Surgical, Maternity and General Wards.
4. Which approach would you recommend? Explain your answer.
5. Can you suggest further improvements to Southern Districts costing/billing system?

Transcribed Image Text:

Number of patients Patient-days Surgical Ward Matemity Ward 10 000 1 000 1 000 5 000 General Ward 20 000 3 000 Surgical Surgical Ward Surgical Total staff Ward hours Ward Medical staff hours 10 000 50 000 120 000 40 000 100 000 Nursing staff hours 10 000 250 000 120 000