Eastern Star Nursing Home Has Been Using an Indirect Overhead

question 82

Essay

Eastern Star Nursing Home has been using an indirect overhead job cost system for allocating general and nursing overhead charges to all patients. However, during the past few months the facility has been losing patients because a competing nursing home charges much less for some classes of patients. It seems that Eastern Star is keeping the well patients and losing those who require special attention. The facilities manager believes that a refined costing system can improve the allocation of charges to all patients. Hopefully this will reduce the charges to the more ill patients.
The accounting staff provided information for September. The costs have traditionally been allocated to patients based on nursing days. However, the accounting staff can separate nursing days by nursing category. At the request of the facilities manager, the following information was furnished concerning nursing days.
Hazel Jones, a long-time patient, spent 5 days in Critical Care, 4 days in Special Care, and 21 days in General Care during September. Her monthly assignment of nursing days was: 2 for Senior RN, 6 for RN, 10 for PN, and 12 for Nurse's aide.
Required:
a. Determine the amount of cost to be covered by Hazel Jones if the daily pay rates presented in the table are used for staff services and overhead is added on a care area per day basis.
b. For each patient care area determine the total cost per day to be charged to patients using the weighted average staff services cost for the daily pay rate portion of total costs. What is cost to be covered by Hazel Jones' charge for the month of September?

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Definitions:

Profitability Ratios

Measures of a company’s overall financial performance by evaluating its ability to generate revenues in excess of expenses.

Inventory Turnover

Inventory turnover is a ratio showing how many times a company's inventory is sold and replaced over a specific period, indicating the efficiency of inventory management.

Return on Equity

A measure of the profitability of a business in relation to the equity, calculated as net income divided by shareholders' equity, expressing the company's ability to generate profits from its shareholders' investments.

Net Profit Margin

It is a financial metric that indicates how efficient a company is at generating profit compared to its revenue, expressed as a percentage.