Cost Assignment Review for Community Hospital's New Clinic
Scenario
Community Hospital is considering offering a new clinic for hospital employees and their dependents. The Accounting Manager would like you to assist with a review of cost assignments within the cost accounting system for a new service that is being considered. They review the following new service and cost with you.
There will be a manager hired to oversee the operations of the new service at a salary of $6,000 per month. Technical staff will be scheduled on an as-needed basis, based on number of tests done, and will be paid $25.00 per hour. In addition, there will be one new full-time unit secretary at $15.00 per hour. A maintenance contract has been purchased to cover any needed repairs on the equipment at a cost of $10,000 for 12 months. Office supplies generally run about the same each month, and are roughly $100. Each test requires approximately the $75 of testing supplies. The office rent is $1,000 per month for the first year and then increases to $1,200 for the second year. Electricity to run all of the office equipment is expected to be $750 per month. Travel expenses for the manager will be $150.
Instructions
The Accounting Manager would like you to first create a Word document where you describe the characteristics of direct vs. indirect expenses and variable vs fixed expense. Following your discussion, you should create a table to classify each cost item (AI) as:
Direct or indirect (D or I)
Variable or fixed (V or F)
She has asked you to prepare a table in Word with the following information:You will have two answers (D or I; V or F) for each of the following items:
Cost Item D or I V or F
Department Manager
Technical Staff
Unit Secretary
Maintenance Contract
Office Supplies
Testing Supplies
Office Rent
Electricity
Travel Expenses
Finally, in your document, the Accounting Manager would like to know if there are any other assumptions that you have made in making your selections in the table.
Cost Assignment Review for Community Hospital's New Clinic
Characteristics of Expenses
Direct vs. Indirect Expenses
Direct Expenses are costs that can be directly traced to a specific service, product, or department. These expenses are incurred specifically for the operation of a particular clinic or function and can be directly associated with the revenue generated by that service.
Examples: Salaries of staff who work directly in the clinic, testing supplies used for patient tests.
Indirect Expenses are costs that cannot be directly traced to a specific service or department. These costs support the overall operations of the organization but cannot be directly linked to specific outputs.
Examples: Administrative salaries, utilities for the entire facility, and general office supplies.
Variable vs. Fixed Expenses
Variable Expenses are costs that change in proportion to the level of activity or volume of services provided. These costs increase or decrease based on the number of services rendered or products sold.
Examples: Testing supplies and technical staff wages, which vary based on the number of tests performed.
Fixed Expenses remain constant regardless of the level of activity within a certain range. These costs do not fluctuate with the volume of services provided and are incurred even if no services are rendered.
Examples: Office rent, manager’s salary, and maintenance contracts.
Cost Classification Table
Cost Item D or I V or F
Department Manager D F
Technical Staff D V
Unit Secretary D F
Maintenance Contract I F
Office Supplies I V
Testing Supplies D V
Office Rent I F
Electricity I F
Travel Expenses I V
Assumptions Made
In classifying the costs above, several assumptions were made:
1. Department Manager Salary: It is assumed that the department manager is directly responsible for overseeing the clinic's operations, thus making it a direct expense, while being fixed as it does not change with the level of services provided.
2. Technical Staff Wages: The technical staff is assumed to be directly involved in providing services, making this a direct expense; however, their hours worked can vary significantly based on patient volume, thus classifying this cost as variable.
3. Unit Secretary Salary: The unit secretary is also assumed to be directly tied to the operations of the clinic, thus being classified as a direct expense; it is also fixed since they will work full-time regardless of patient volume.
4. Maintenance Contract: This cost is considered indirect because it covers equipment used for multiple services in the hospital rather than being specific to the clinic. It is fixed as it remains constant throughout the year.
5. Office Supplies: Although office supplies are necessary for the clinic, they are considered indirect as they support overall operations and can vary based on usage, making them variable.
6. Testing Supplies: These are directly related to the services provided and vary depending on the number of tests, hence classified as direct and variable.
7. Office Rent: This cost supports the clinic but is not directly traceable to any specific service, thus classified as indirect. It is also fixed for the first year.
8. Electricity Costs: These are considered indirect because they support multiple departments within the facility and are treated as fixed in this context.
9. Travel Expenses: While these costs support the manager's role in overseeing operations (indirect), they vary based on travel needs, thus classified as variable.
By making these distinctions, we can better understand the financial implications of operating the new clinic and ensure accurate cost tracking and reporting.