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Activity-Based Costing

Activity-Based Costing. Frumerville Hospital has always determined the full

cost of serving patients by accounting for the direct and indirect costs of all

hospital operations. The hospital uses the step-down method of allocating

indirect costs: The costs of nonrevenue producing departments are allocated

in sequence to departments they serve, whether or not these produce revenue.

Once the costs of a department have been allocated, the costing process for

that department is closed, and it receives no further charges. A new CFO has

recently joined the hospital after a distinguished career in the manufacturing

industry. In that capacity, he initiated activity-based costing (ABC), which resulted

in a documented savings to the business. As an accounting assistant,

you have been asked to meet with the CFO to discuss the issues involved in

implementing ABC in this hospital. A copy of the hospital's most recent stepdown

expense distribution is presented on the following page. See page 544.


In preparation for the meeting, answer the following questions by examining the

expense distribution:

a. What activities¬Ě do you consider most appropriate in describing the operations

of the hospital?

b. What are the cost drivers of these programs?

c. What particular problems do you expect to face in implementing ABC in this



Solution Preview

Your response is 356 words.

I will answer (a) and (b) together since they are related.

ABC allocating indirect costs so I would review the "general services" which would be allocated using the ABC methods. The activities would be the cost drivers that I would consider in an ABC implementation.

From reviewing the step-down expense distribution, it seems that nursing services represent the largest indirect costs so a measure of nursing resource use would be needed. This might be nursing hours, nursing procedures, number of patients or number of bed nights, ...

Solution Summary

Your response is 356 words.