The questions for Watts Health Services (WHS)

1. Diagram the cost system (MORAS) used at WHS to allocate costs to the two clinics (Compton and Westwood). Clearly identify the allocation bases (not the dollar rates) used to assign these costs.

2. (a) What is the allocation of the budgeted Accounting and Legal Service (A and LS) costs to the other four responsibility centers for 2012? show calculations.

(b) What is the allocation of the budgeted IT costs to the Westwood clinic for 2012? show calculations

(c) What is the allocation of the budgted Billing services costs to the Westwood clinic for 2012? show caculations

(d) what is the budgetd pre-tax profit for the Westwood clinic for 2012?

3. Consider the cost management system at WHS.

(a) what is the changes would you recommend for allocating costs from the cost centers to the clinics. bBe brief and explicit. Discuss changes for each of the three cost centers.

- Accounting and legal services

- information technology

- billing services

(b) WHS is developing a new accounting system (TRACSS)

- identify one characteristic that TRACSS shares with an activity-based cost system.

- identify two ways in which TRACSS differs from an activity -based cost system.

(C) Meg White, the mangager of Billing Services, says that the clinics claim that they are the customers of Billing Services. Describe two ways in which you would change the management accounting system to improve the interacting of billing services and the clinics.

4. (a) Given the way WHS measures ROI, what is the budgeted ROI associated with the acquisition of the medical equipment for the Compton Clinic for the year 2004 ( the first year of operation)? show calculations.

(b) Given the way WHS measures EVA, what is the budgeted EVA associated with the acquisition of the medical equipment for the year 2004 (the first operation)? if you are stuck, remember that EVA is a bradned version of resifual income, there is nothing here that you have not already seen. show calculations

(c) A WHS analyst has suggested that a problem with using EVA to compare the performance of mangagers in different responsibility centers is that it does not adjust for size.the analyst suggests that WHS adopt a performance measure of EVA divided by assets. explain briefly and explicitly whether you agree with the analyst's suggestion, along with your reasons.

5. (a) compute the "capacity" cost variance for fixed direct costs for the Compton clinic for 2012.

(b) Compute the "patient Mix" costs variance for Compton clinic for 2012.

(c) the direct cost variance for the Westwood clinic was $47,000 unfavorable ($2,047,000 - $2,000,000). Provide a detailed analysis that indentifies and quantifies the sources of this variance. i.e. price and quantity/efficiency variance for PD and HD as well as a spending variance for the fixed costs.

6. From the corporate perspective considering costs alone, what is the minimum price per hour Jim McEnroe (IT) can charge Alison Britanica, the local free clinic manager, and not reduce WHS income, assuming she (Alison) uses 1,000 hours of computer timne.

7. The Westwood Clinic has a program designed to attract new patients.

(a) assume everything happens according to the budgered assumptios (prices, costs, service mix, etc.)? what is the annual contribution margin of an HD patient for Westwood? If necessary, assume ther are 50 weeks in a year. show calculations.

(b) Again, assuming all budgeting assumptions are correct. How many HD and PD patients does the Westwood clinic need to treat in order to earn zero profit (breakeven) considering only the direct costs (ignoring allocations) of the Westwood clinic?

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Watts Health Services I became a doctor to heal people, not run a business. But, with health care costs heading out of control, the only way we can survive is to apply some of the tools of cost management to the practice. I wish I could focus on new drugs and medical procedures, but right now the best thing I can do for our patients is continue to find ways to take costs out of the system. Andrew Sood, MD President & CEO Organization Watts Health Services (WHS) is an independent, for-profit, health care firm located in Oakland, California. The firm is organized in two groups-General Administration and Clinic Services (see Exhibit 1). General Administration includes Accounting and Legal Services (A&LS), Information Technology (IT), and Billing Services. Clinic Services consists of two clinics, which provide different services. The Westwood Clinic provides kidney dialysis services. The Compton Clinic provides walk-in emergency services. (See below for more complete descriptions.) Clinic Services Clinic Services oversees the operation of the two clinics. The clinics (and Clinic Services) have been organized as profit centers and the clinic managers are evaluated on return-on-investment (ROI). ROI is computed as after-tax accounting income divided by net clinic assets measured at the beginning of the year. The managers are paid a bonus for exceeding the estimated after-tax cost-of-capital (8%). The bonus paid cannot exceed 30% of the base salary and no bonus is paid for an ROI below 6%. The Westwood Clinic is designed to provide renal dialysis treatments to kidney patients. There are two types of treatments. Hemodialysis (HD) treatments require patients to visit the clinic three (3) times per week. At the clinic, they receive the treatment using expensive, specialized equipment Peritoneal dialysis Watts Health Services I became a doctor to heal people, not run a business. But, with health care costs heading out of control, the only way we can survive is to apply some of the tools of cost management to the practice. I wish I could focus on new drugs and medical procedures, but right now the best thing I can do for our patients is continue to find ways to take costs out of the system. Andrew Sood, MD President & CEO Organization Watts Health Services (WHS) is an independent, for-profit, health care firm located in Oakland, California. The firm is organized in two groups-General Administration and Clinic Services (see Exhibit 1). General Administration includes Accounting and Legal Services (A&LS), Information Technology (IT), and Billing Services. Clinic Services consists of two clinics, which provide different services. The Westwood Clinic provides kidney dialysis services. The Compton Clinic provides walk-in emergency services. (See below for more complete descriptions.) Clinic Services Clinic Services oversees the operation of the two clinics. The clinics (and Clinic Services) have been organized as profit centers and the clinic managers are evaluated on return-on-investment (ROI). ROI is computed as after-tax accounting income divided by net clinic assets measured at the beginning of the year. The managers are paid a bonus for exceeding the estimated after-tax cost-of-capital (8%). The bonus paid cannot exceed 30% of the base salary and no bonus is paid for an ROI below 6%. The Westwood Clinic is designed to provide renal dialysis treatments to kidney patients. There are two types of treatments. Hemodialysis (HD) treatments require patients to visit the clinic three (3) times per week. At the clinic, they receive the treatment using expensive, specialized equipment Peritoneal dialysis

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