Case1 DubaiM edicalCenter

DubaiM edicalCenteroperatesageneralhospital.T hem edicalcenteralsorentsspaceandbedstoseparately ow nedentitiesrenderingspecializedservices,suchasP ediatricsand P sychiatricCare.DubaiM edicalCenterchargeseachseparateentity forcom m onservices,suchaspatients'm ealsandlaundry,andforadm inistrativeservices,suchasbillingsandcollections.S paceand bedrentalsarefixedchargesfortheyear,basedonbedcapacity rentedtoeachentity.DubaiM edicalCenterchargedthefollow ingcoststoP ediatricsfortheyearendedJune30,20x1:

DuringtheyearendedJune30,20x1,P ediatricscharged eachpatientanaverageof$300 perday,hadacapacity of60 beds,andhadrevenueof$6 m illionfor365 days.Inaddition,P ediatricsdirectly em ployedpersonnelw iththefollow ingannualsalary costsperem ployee:supervisingnurses,$25,000;nurses,$20,000;andaides,$9,000.

DubaiM edicalCenterhasthefollow ingm inim um departm entalpersonnelrequirem ents,basedontotalannualpatientdays:

P ediatricsalw aysem ploysonly them inim um num berofrequiredpersonnel.S alariesofsupervisingnurses,nurses,andaidesarethereforefixedw ithinrangesofannualpatientdays. P ediatricsoperatedat100 percentcapacity on90 daysduringtheyearendedJune30,20x1.Adm inistratorsestim atethat

onthese90 days,P ediatricscouldhavefilledanother20 bedsabovecapacity.DubaiM edicalCenterhasanadditional20 bedsavailableforrentfortheyearendingJune30,20x2.S uchadditionalrentalw ouldincreaseP ediatrics'fixedchargesbasedonbedcapacity. (Inthefollow ingrequirem ents,ignoreincom etaxes.)

R equired:1. Calculatethem inim um num berofpatientdaysrequiredforP ediatricstobreakevenforthe

yearendingJune30,20x2,iftheadditional20 bedsarenotrented.P atientdem andisunknow n,butassum ethatrevenueperpatientday,costperpatientday,costperbed,andsalary ratesw illrem ainthesam easfortheyearendedJune30,20x1.

2. Assum ethatpatientdem and,revenueperpatientday,costperpatientday,costperbed,andsalary ratesfortheyearendingJune30,20x2,rem ainthesam easfortheyearendedJune30,20x1.P repareascheduleofP ediatrics'increaseinrevenueandincreaseincostsfortheyearendingJune30,20x2.Determ inethenetincreaseordecreaseinP ediatrics'earningsfrom theadditional20 bedsifP ediatricsrentsthisextracapacity from DubaiM edicalCenter.

Case2 EarthandArtistry Inc.

EarthandArtistry,Inc.providescom m erciallandscapingservices.S ashaCairns,thefirm 'sow ner,w antstodevelopcostestim atesthatshecanusetopreparebidsonjobs. Afteranalyzingthefirm 'scosts,Cairnshasdevelopedthefollow ingprelim inary costestim atesforeach1,000 squarefeetoflandscaping.

Cairnsisquitecertainabouttheestim atesfordirectm aterialand directlabor. How ever,sheisnotascom fortablew iththeoverheadestim ate. T heestim ateforoverheadisbasedontheoverheadcoststhatw ereincurredduringthepast12 m onthsaspresentedinthefollow ingschedule.T heestim ateof$18 perdirect-laborhourw asdeterm ined by dividingthetotaloverheadcostsforthe12-m onthperiod($648,000)by thetotaldirect-laborhours(36,000).

Cairnsbelievesthatoverheadisaffectedby totalm onthly direct-laborhours.Cairnsdecidedtoperformaleast-squaresregressionofoverhead(O H)ontotaldirect-laborhours(DL H). T hefollow ingregressionform ulaw asobtained.

R equired:1. T heoverhead ratedevelopedfrom theleast-squaresregressionisdifferentfrom Cairns'

prelim inary estim ateof$18perdirect-laborhour. Explainthedifferenceinthetw ooverheadrates.

2. U singtheoverheadform ulathatw asderivedfrom theleast-squaresregression,determ ineatotalvariable-costestim ateforeach1,000 squarefeetoflandscaping.

3. Cairnshasbeenaskedtosubm itabidonalandscapingprojectforthecity governm entconsistingof60,000 squarefeet.Cairnsestim atesthat40 percentofthedirect-laborhoursrequiredfortheprojectw illbeonovertim e.Calculatetheincrem entalcoststhatshouldbeincludedinany bid thatCairnsw ould subm itonthisproject.U setheoverhead form uladerivedfrom theleast-squaresregression.

4. S houldm anagem entrely ontheoverheadform uladerivedfrom theleast-squaresregressionasthebasisforthevariableoverheadcom ponentofitscostestim ate? Explainyouransw er.

5. Afterattendingasem inaronactivity-basedcosting,Cairnsdecidedtofurtheranalyzethecom pany'sactivitiesandcosts.S hediscoveredthatam oreaccurateportrayalofthefirm 'scostbehaviorcouldbeachievedby dividingoverheadintothreeseparatepools,eachw ithitsow ncostdriver. S eparateregressionequationsw ereestim atedforeachofthecostpools,w iththefollow ingresults.

Assum ethat5 direct-laborhoursw illbeneeded tolandscapeeach1,000 squarefeet,regardlessofthespecificplantingm aterialused.

a) S upposethelandscapingprojectforthecity w illinvolveseedingall60,000 squarefeetofturfandplanting80 treesandshrubs.Calculatetheincrem entalvariable overheadcostthatCairnsshouldincludeinthebid.

b) R ecom putetheincrem entalvariableoverheadcostforthecity'slandscapingprojectassum inghalfofthe60,000-square-footlandscapingareaw illbeseededandtherew illbe250 individualplantings.T heplantingsw illcovertheentire60,000-square-footarea.

c) c. Briefly explain,usingconceptsfrom activity-basedcosting,w hy theincrem entalcostsdifferinrequirem ents(a)and(b).