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Group 7 GU Yujie Maggie PENG Xueman Shirley

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Presentation on theme: "Group 7 GU Yujie Maggie PENG Xueman Shirley"— Presentation transcript:

1 Group 7 GU Yujie 15408426 Maggie PENG Xueman 15408353 Shirley
JIA Xuanyue Jacey SONG Bichun Song DUAN Huiying Alice ZHANG Haishu Caroline

2 14-16 Cost allocation in hospitals, alternative allocation criteria
Cost allocation in hospitals, alternative allocation criteria. Dave Meltzer vacationed at Lake Tahoe last winter. Unfortunately, he broke his ankle while skiing and spent two days at the Sierra University Hospital. Meltzer’s insurance company received a $4,800 bill for his two-day stay. One item that caught Meltzer’s attention was an $11.52 charge for a roll of cotton. Meltzer is a salesman for Johnson & Johnson and knows that the cost to the hospital of the roll of cotton is between $2.20 and $3.00. He asked for a breakdown of the $11.52 charge. The accounting office of the hospital sent him the following information: a. Invoiced cost of cotton roll $ 2.40 b. Cost of processing of paperwork for purchase 0.60 c. Supplies-room management fee 0.70 d. Operating-room and patient-room handling costs 1.60 e. Administrative hospital costs 1.10 f. University teaching-related costs 0.60 g. Malpractice insurance costs 1.20 h. Cost of treating uninsured patients 2.72 i. Profit component 0.60 Total $11.52

3 Meltzer believes the overhead charge is outrageous
Meltzer believes the overhead charge is outrageous . He comments, “There was nothing I could do about it. When they come in and dab your stitches, it’s not as if you can say, ‘Keep your cotton roll. I brought my own.’” 1. Compute the overhead rate Sierra University Hospital charged on the cotton roll. 2. What criteria might Sierra use to justify allocation of the overhead items b–i in the preceding list? Examine each item separately and use the allocation criteria listed in Exhibit 14-8 in your answer. 3. What should Meltzer do about the $11.52 charge for the cotton roll?

4 Indirect costs ($11.52 – $2.40) = $9.12
1. Compute the overhead rate Sierra University Hospital charged on the cotton roll. 1. Direct costs = $2.40 Indirect costs ($11.52 – $2.40) = $9.12 Overhead rate = $9.12/ $ = 380%

5 2. What criteria might Sierra use to justify allocation of the overhead items b–i in the preceding list? Examine each item separately and use the allocation criteria listed in Exhibit in your answer.

6 Cause and Effect variables are identified that cause resources to be consumed Most credible to operating managers Integral part of ABC Benefits Received the beneficiaries of the outputs of the cost object are charged with costs in proportion to the benefits received Fairness (Equity) the basis for establishing a price satisfactory to the government and its suppliers Cost allocation here is viewed as a “reasonable” or “fair” means of establishing selling price Ability to Bear costs are allocated in proportion to the cost object’s ability to bear them Generally, larger or more profitable objects receive proportionally more of the allocated costs

7 Overhead Cost Item Allocation Criteria B.Processing of paperwork for purchase C.Supply-room management fee D.Operating-room and patient- room handling costs E.Administrative hospital costs F.University teaching-related costs G.Malpractice insurance costs H.Cost of treating uninsured patients I.Profit component B.Cause and effect C.Benefits received D.Cause and effect E.Benefits received F.Ability to bear G.Ability to bear or benefits received H.Ability to bear I None. This is not a cost.

8 3.What should Meltzer do about the $11.52 charge for the cotton roll?
3. Assuming that Meltzer’s insurance company is responsible for paying the $4,800 bill, Meltzer probably can only express outrage at the amount of the bill. The point of this question is to note that even if Meltzer objects strongly to one or more overhead items, it is his insurance company that likely has the greater incentive to challenge the bill. Individual patients have very little power in the medical arena. In contrast, insurance companies have considerable power and may decide that certain costs are not reimbursable—for example, the costs of treating uninsured patients.

9 Wholesale Customers Retail Customers
14-17 customer profitability, customer-cost hierarchy Enviro-Tech has only two retail and two wholesale customers. Customer for 2013 (in thousands) Wholesale Customers Retail Customers North American Wholesaler South American Wholesaler Green Energy Global Power Revenue at list prices $375,000 $590,000 $175,000 $130,000 Discounts from list prices 25,800 47,200 8,400 590 Cost of goods sold 258,000 510,000 144,000 95,000 Delivery costs 4,550 6,710 2,230 2,145 Order processing costs 3,820 5,980 2,180 1,130 Cost of sales visit 6,300 2,620 1,575

10 Q1:customer-level operating income .
Annual distribution-channel costs:$33million (wholesale customers) :$12million (retail customers) Annual corporate-sustaining costs:$48million(salary&admin. cost) No cause-and-effect or benefits-received relationship between cost- allocation base. (Enviro-Tech could save corporate-sustaining costs only if the company completely shut down.) Q1:customer-level operating income . (Format in exhibit 14-3)

11 Customer Profitability Analysis :
Analyzes activities, Identifies proper cost drivers, Determines realized profits from customers. Focuses on: Selling, General, Administrative costs. Allows managers to: Strategic customer acquisition Continuous improvement Setting prices based on the cost to serve Value added service management

12 Customer output unit-level costs—costs of activities to sell each unit (computer) to a customer. An example is product-handling costs of each computer sold. Customer batch-level costs—costs of activities related to a group of units (computers) sold to a customer. Examples are costs incurred to process orders or to make deliveries. Customer-sustaining costs—costs of activities to support individual customers, regardless of the number of units or batches of product delivered to the customer. Examples are costs of visits to customers or costs of displays at customer sites. Distribution-channel costs—costs of activities related to a particular distribution channel rather than to each unit of product, each batch of product, or specific customers. An example is the salary of the manager of the Provalue Division’s wholesale distribution channel. Division-sustaining costs—costs of division activities that cannot be traced to individual customers or distribution channels. The salary of the Provalue Division manager is an example of a division-sustaining cost.

13

14 All amounts in thousands of U.S. dollars
Wholesale Retail North America Wholesaler South America Green Energy Global Power Revenues at list prices $375,000 $590,000 $175,000 $130,000 Price discounts 25,800 47,200 8,400 590 Revenues (at actual prices) 349,200 542,800 166,600 129,410 Cost of goods sold 285,000 510,000 144,000 95,000 Gross margin 64,200 32,800 22,600 34,410 Customer-level operating costs Delivery 4,550 6,710 2,230 2,145 Order processing 3,820 5,980 2,180 1,130 Sales visit 6,300 2,620 1,575 Total customer-level oper. costs 14,670 15,310 7,030 4,850 Customer-level operating. income $ 49,530 $ 17,490 $ 15,570 $ 29,560

15 Additional Information
17-2. Prepare a customer-cost hierarchy report, using the format in Exhibit 14-6. Additional Information Distribution-channel costs are not customer-level costs, because changes in customers behavior will have no effect on these costs Corporate-sustaining costs has no direct cause -and-effect relationship with profitability of different customers.

16

17 ① Revenues(at actual prices)=Revenues at list prices - Price discounts
Customer Distribution Channels All amounts in thousands of U.S. dollars Wholesale Customers Retail Customers Total (all customers) Total Wholesaler North- America Wholesaler South- America Wholesaler Total Retail Green Energy Global Power (1) = (2) + (5) (2) = (3) + (4) (3) (4) (5) = (6) + (7) (6) (7) Revenues (at actual prices)① $ 1,188,010 $ 892,000 $ 349,200 $ 542,800 $ 296,010 $ 166,600 $ 15,570 Customer-level costs② 1,050,860 824,980 299,670 525,310 243,880 151,030 99,850 Customer-level operating income 112,150 67,020 $ ,530 $ 17,490 45,130 $ 15,570 $ 29,560 Distribution-channel costs 45,000 33,000 12,000 Distribution- channel-level oper. income 67,150 $ ,020 $ 33,130 Corporate-sustaining costs 48,000 Operating income $ ,150 ① Revenues(at actual prices)=Revenues at list prices - Price discounts ② Customer-level costs=Cost of goods sold + Total customer-level oper. costs

18 3. Enviro-Tech’s management decides to allocate all corporate-sustaining costs to distribution channels: $38 million to the wholesale channel and $10 million to the retail channel. As a result, distribution channel costs are now $71million($33 million + $38 million) for the wholesale channel and $22 million($12 million + $10 million) for the retail channel. Calculate the distribution channel–level operating income. On the basis of these calculations, what actions, if any, should Enviro-Tech’smanagers take? Explain.

19 Corporate-sustaining costs Distribution-channel costs
New allocation 48 million Corporate-sustaining costs 38 million Wholesale 10 million Retail Distribution-channel costs

20 All amounts in thousands of U.S. dollars
Calculation---From Q1 1. All amounts in thousands of U.S. dollars Wholesale Retail North America South America Green Global Wholesaler Energy Power Revenues at list prices $375,000 $590,000 $175,000 $130,000 Price discounts 25,800 47,200 8,400 590 Revenues (at actual prices) 349,200 542,800 166,600 129,410 Cost of goods sold 285,000 510,000 144,000 95,000 Gross margin 64,200 32,800 22,600 34,410 Customer-level operating costs Delivery 4,550 6,710 2,230 2,145 Order processing 3,820 5,980 2,180 1,130 Sales visit 6,300 2,620 1,575 Total customer-level oper. costs 14,670 15,310 7,030 4,850 Customer-level operating. income $ 49,530 $ 17,490 $ 15,570 $ 29,560

21 2.Customer Distribution Channels(all amounts in $000s) ---Old
Calculation---From Q2 2.Customer Distribution Channels(all amounts in $000s) ---Old (all customers) Wholesale Retail Revenues (at actual prices) $1,188,010 $892,000 $296,010 Customer-level costs 1,050,860 824,980 243,880 Customer-level operating income 112,150 67,020 45,130 Distribution-channel costs 45,000 33,000 12,000 Distribution-channel-level oper. income 67,150 $34,020 $33,130 Corporate-sustaining costs 48,000 Operating income $19,150 71,000 22,000 0.00

22 Calculation---new allocation
3.Customer Distribution Channels(all amounts in $000s) ---NEW (all customers) Wholesale Retail Revenues (at actual prices) $1,188,010 $892,000 $296,010 Customer-level costs 1,050,860 824,980 243,880 Customer-level operating income 112,150 67,020 45,130 Distribution-channel costs 93,000 71,000 22,000 Distribution-channel-level oper. income 27,110 23,130 3,980 Corporate-sustaining costs Operating income $19,150

23 What implication? There is, however, no cause-and-effect or benefits-received relationship between corporate costs and any allocation base i.e., the allocation of $38,000,000 to the wholesale channel and $10,000,000 to the retail channel is arbitrary and not useful for decision making.

24 What should the management do?
The management of Enviro-Tech should not base any performance evaluations or investment/disinvestment decisions based on these channel-level operating income numbers. They may want to take corporate costs into account, however, when making long-run pricing decisions.

25 4.How might Enviro-Tech use the new cost information from its activity-based costing system to better manage its business? Evaluating the customer-level costs Determining which activities are valuable to the customer that they are willing to pay for. Use activity-based cost information to better manage its business KEY DECISION!!

26 4.How might Enviro-Tech use the new cost information from its activity-based costing system to better manage its business? Eg: costs of sales visits for the North America Wholesaler are $6,300, which is more than double the cost for the South America Wholesaler. The company should evaluate the efficiency and effectiveness of this activity for this customer group. Also use its ABC measurement to the distribution channel costs to determine if any cause-and- effect relationships exist between these costs and the customer types.

27 Thank you !


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