Assignment Questions – VMD Medical Imaging Center
 1. What are the signs of obsolescence of VMD’s existing costing system that uses direct labor costs as overhead allocation driver?

   

2. Calculate the product cost for each of the four tests in accordance with:
 a. The existing costing system
 b. The costing system proposed by Crest, the accountant
 c. The costing system proposed by Posh, the consultant

   

3. Which costing system would you choose? Why?

   

4. Consider VMD’s recent investment in the 3D MRI equipment. While this technology allows the Medical Imaging Center to stay at the forefront technological developments in the field, it is currently underutilized. How would you propose to treat the new equipment form a costing system standpoint?

   

5. Which of the following choices is more in line with your plan?
a. Use the current costing system and include the purchase and maintenance cost of the 3D MRI equipment in the general overhead pool
b. Use the costing system proposed by Crest and include the purchase and maintenance cost of the 3D MRI equipment in the equipment related overhead pool
 c. Use the costing system proposed by Posh and include the purchase and maintenance cost of the 3D MRI equipment in the high-tech equipment overhead pool
 d. Create a separate cost pool for the 3D MRI equipment and allocate its costs only to patients using it

   

6. Discuss the pros and cons of your choice.
 

Transcribed Image Text:

It is late on a January Friday night and President Ron Becks just decided to adjourn the first staff meeting of 2016 at VMD Medical Imaging Center. The morale of the senior management team could certainly use a boost. Despite having recorded a profit in 2015, the discussion about the forecast for the upcoming year had become increasingly tense. Christine Widemeier, VP of Sales, had expressed serious concerns about the trend of the demand for VMD's services. If they wanted to maintain their usual margins, sales prices needed to be increased in 2016 and that was going to hurt. Their major client had already threatened to find an alternative provider, and there was a long line of low-cost competitors ready to jump in. Widemeier's team had made every possible effort to sustain their client's satisfaction, but she wasn't sure that the quality of the relationship would be enough to retain them going forward if prices were to be increased again this year. Something needed to be done to contain costs in production, and quickly. Mike Jankoski, Director of Operations, reacted quite defensively to Widemeier's statement. In his opinion, their processes were as lean as they could be, their technology was better than it had ever been to date, and during the past year his team had achieved many significant efficiency improvements. He did not feel that the root cause of the increased costs were to be searched in operations. Jankoski's view was that his department had been charged with so many costs that were not under his control, and he questioned the appropriateness of the allocations built in the costing system. CFO Laura Gleason did not appreciate Jankoski's reaction and ensured the team that costs were accounted for appropriately. Gleason, instead, pointed to a recent purchase of a new, expensive, state-of-the-art 3D MRI machine, which had been justified as a source of competitive advantage. Due to its current low utilization, she wasn't sure it had been a wise investment, since it had insofar failed to generate sufficient returns to cover the expenses. Before the conversation could get out of hand, Becks decided to send everybody home and suggested to regroup first thing on Monday, hoping that the weekend would restore the collaborative spirit that he was used to seeing in his management team. It is late on a January Friday night and President Ron Becks just decided to adjourn the first staff meeting of 2016 at VMD Medical Imaging Center. The morale of the senior management team could certainly use a boost. Despite having recorded a profit in 2015, the discussion about the forecast for the upcoming year had become increasingly tense. Christine Widemeier, VP of Sales, had expressed serious concerns about the trend of the demand for VMD's services. If they wanted to maintain their usual margins, sales prices needed to be increased in 2016 and that was going to hurt. Their major client had already threatened to find an alternative provider, and there was a long line of low-cost competitors ready to jump in. Widemeier's team had made every possible effort to sustain their client's satisfaction, but she wasn't sure that the quality of the relationship would be enough to retain them going forward if prices were to be increased again this year. Something needed to be done to contain costs in production, and quickly. Mike Jankoski, Director of Operations, reacted quite defensively to Widemeier's statement. In his opinion, their processes were as lean as they could be, their technology was better than it had ever been to date, and during the past year his team had achieved many significant efficiency improvements. He did not feel that the root cause of the increased costs were to be searched in operations. Jankoski's view was that his department had been charged with so many costs that were not under his control, and he questioned the appropriateness of the allocations built in the costing system. CFO Laura Gleason did not appreciate Jankoski's reaction and ensured the team that costs were accounted for appropriately. Gleason, instead, pointed to a recent purchase of a new, expensive, state-of-the-art 3D MRI machine, which had been justified as a source of competitive advantage. Due to its current low utilization, she wasn't sure it had been a wise investment, since it had insofar failed to generate sufficient returns to cover the expenses. Before the conversation could get out of hand, Becks decided to send everybody home and suggested to regroup first thing on Monday, hoping that the weekend would restore the collaborative spirit that he was used to seeing in his management team.

Answer rating: 100% (QA)

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