Lecture 10 Activity-Based Costing Example: The Dialysis Clinic

Dialysis Clinic, Inc. Two types of Dialysis: Hemodialysis (HD) Peritoneal dialysis (PD) Equipment intensive, in-clinic treatment 3 treatments per week 102 patients $1.9 million in revenues self-administered, in-home treatment Daily treatment 62 patients $1.1 million in revenues

Dialysis Clinic, Inc. Summary of Costs and Identification of Cost Drivers: Cost Category Total Cost Alloc-ation Base Units of Allocation Base HD PD Total Standard Supplies $664,900 Not applicable: these are direct costs Episodic Supplies $310,695

Dialysis Clinic, Inc. Summary of Costs and Identification of Cost Drivers: Cost Pool Total Cost Allocation Base Units of Allocation Base HD PD Total Nursing RNs LPNs Admin. Tech.s Total $239,120 404,064 115,168 124,928 $883,280 RN FTEs LPN FTEs treatments dialyzer treatments 5 15 14,343 2 4 20,624 7 19 34,967 Nursing RNs LPNs Admin. Tech.s Total $239,120 404,064 115,168 124,928 $883,280 RN FTEs LPN FTEs treatments dialyzer treatments 5 15 14,343 2 4 20,624 7 19 34,967

Dialysis Clinic, Inc. Summary of Costs and Identification of Cost Drivers: Cost Pool Total Cost Alloca-tion Base Units of Allocation Base HD PD Total General facility Admin Records Utilities Total $233,226 354,682 157,219 40,698 $785,825 Sq ft patients treatmts Kilowatts 18,900 102 14,343 563,295 11,100 62 20,624 99,405 30,000 164 34,967 662,700

Dialysis Clinic, Inc. Summary of Costs and Identification of Cost Drivers: Cost Pool Total Cost Alloc-ation Base Units of Allocation Base HD PD Total Dur-able equip-ment 137,046 Nursing Svc Cost $661,966 $221,314 $883,280

Dialysis Clinic, Inc. Calculation of Overhead Rates: Cost Pool Total cost Total Units of AllocationBase Overhead Rate Nursing RNs LPNs Admin Technicians Total $239,120 404,064 115,168 124,928 $883,280 7 19 34,967 14,343 $34,160 per RN FTE $21,267 per LPN FTE $3.29 per treatment $8.71 per dialyzer treatment

Dialysis Clinic, Inc. Calculation of Overhead Rates: Cost Pool Total cost Total Units of AllocationBase Overhead Rate General Facility Admin Records Utilities Total $233,226 354,682 157,219 40,698 $785,825 30,000 164 34,967 662,700 $7.774 per sq ft $2,163 per patient $4.496 per treatmt $0.0614 per kilowatt

Dialysis Clinic, Inc. Calculation of Overhead Rates: Cost Pool Total cost Total Units of AllocationBase Overhead Rate Durable equipment $137,046 $883,280 $0.15516 per nursing service dollar

Dialysis Clinic, Inc. Allocation of Costs using A.B.C.: Cost Category O/H Rate HD Units Cost PD Standard supplies Episodic Supplies Direct cost $512,619 98,680 $152,281 $212,015

Dialysis Clinic, Inc. Allocation of Costs using A.B.C.: Cost Pool O/H Rate HD Units Cost PD Nursing RNs LPNs Admin Tech.s Total 34,160 21,267 3.29 8.71 5 FTEs 15 FTEs 14,343* * treatments $170,800 318,998 47,240 124,928 $661,966 2 4 20,624 $68,320 85,066 67,928 221,314

Dialysis Clinic, Inc. Allocation of Costs using A.B.C.: Cost Pool O/H Rate HD Units Cost PD general facility admin records utilities Total 7.774 2,164 4.496 .0614 18,900 sq ft 102 patient 14,343 563,295 $146,933 220,595 64,489 34,593 $466,610 11,100 62 20,624 99,405 $86,293 134,087 92,730 6,105 319,215

Dialysis Clinic, Inc. Allocation of Costs using A.B.C.: Cost Pool O/H Rate HD Units Cost PD durable equip-ment $.15516 per nursing dollar 661,966 $102,785 221,314 $34,261

Dialysis Clinic, Inc. Summary of Costs: Cost Category HD PD Standard Supplies Episodic Supplies Nursing Services General Overhead Durable equipment Total $512,619 98,680 661,966 466,610 102,785 $1,842,660 $152,281 212,015 221,314 319,215 34,261 $939,086

Dialysis Clinic, Inc. Summary of profitability: HD PD “Traditional” Costing Revenue Direct Costs Indirect Costs Net Income Activity-Based Costing $1,860,287 611,299 1,389,347 ($140,359) 1,231,361 $17,627 $1,146,488 364,296 416,804 365,388 574,790 $207,402

Dialysis Clinic, Inc. Summary of profitability: HD PD R.C.C. Costing Revenue Direct Costs Indirect Costs Net Income $1,860,287 611,299 1,117,463 $131,525 $1,146,488 364,296 688,688 93,504