ABC, health care Uppervale Health Center runs three programs: (1) alcoholic rehabilitation (2) drug addict rehabilitation, and (3) aftercare (counseling and support of patients after release from a mental hospital). The center’s budget for 2009 follows:

Professional salaries:

Muriel Clayton, the director of the center, is keen on determining the cost of each program. Clayton compiled the following data describing employee allocations to individual programs:

Eighty patients are in residence in the alcohol program, each staying about six months. Thus, the clinic provides 40 patient-years of service in the alcohol program. Similarly, 100 patients are involved in the drug program for about six months each. Thus, the clinic provides 50 patient-years of service in the drug program.

Clayton has recently become aware of activity-based costing as a method to refine costing systems. She asks her accountant Huey-Deluth, how she should apply this technique. Deluth obtains the following information:

1. Consumption of medical supplies depends on the number of patient-years.

2. General overhead costs consists of:

3. Other information about individual departments are:

1. a. Selecting cost-allocation bases that you believe are the most appropriate for allocating indirect costs to programs, calculate the indirect cost rates for medical supplies; rent and clinic maintenance; administrative costs for patient charts, food, and laundry; and laboratory services.

b. Using an activity-based costing approach to cost analysis, calculate the cost of each program and the cost per patient-year of the alcohol and drug programs.

c. What benefits can Uppervale Health Center obtain by implementing the ABC system?

2. What factors, other than cost, do you think Uppervale Health Center should consider in allocating resources to its programs?

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4 physicians x $150,000 18 psychologists × $75,000 20 nurses x $30,000 Medical supplies $ 600,000 1,350,000 600,000 $2,550,000 300,000 General overhead (administrative salaries, rent, utilities, etc.) 880,000 Total $3,730,000