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VMD Medical Center

Costing and Pricing at VMD MIC

To calculate the total cost of each procedure, the MIC traces the Direct Labor (DL) component of the procedure, and adds an allocation of overhead based on the DL $ of each type of service. Overhead costs are allocated as a function of DL $ through the calculation of a burden rate per direct labor dollar consumed by a specific service (Exhibit 2). This consumption of DL $ by individual services is indicated in Exhibit 3.

Becks invited his most senior management accountant Crest, suggesting the following:

In its current method, the MIC groups all overhead costs together and then allocates based on DL$. Equipment related overhead is the largest contributor to overhead and differs widely across tests. We currently do not have a good understanding of this overhead component. I propose the MIC break down overhead costs in two core components, Direct Labor Related Overhead and Equipment Related Overhead. Equipment Related Overhead should then be allocated to each test by their use of equipment time per year. This will provide a more accurate breakdown of cost.

With additional research, Crest identifies the part of overhead that was equipment related and the yearly use of each piece of equipment by the 4 services (Exhibit 4). Ms. Posh reviews Crests findings and proposes

Equipment costs are not just a function of total use. Some machines are notably more high-tech than others and hence are more expensive, and require extra attention to meet federal regulations. By further breaking down equipment run time into high-tech and low-tech, we will be able to gain an even better understanding of the true costs of each test.

Ms. Posh collects additional information to further break down the use of each piece of equipment per year into use of High-tech and Low-tech equipment and disaggregates the Equipment Related Overhead in High Tech Equipment Related Overhead and Low Tech Related Overhead (Exhibit 5).

Exhibit 1 VMD Medical Imaging Center 2017 Summary Financial Results

Revenues	$3,520,018
Direct Labor	$1,375,571
Overhead	$1,982,428
Total Expenses	$3,357,999
Profit	$162,019

Exhibit 3 VMD MIC Direct Labor Cost Breakdown by Service

Service	Direct Labor ($)
Projectional Radiographs	$417,073
Fluoroscopies	$414,047
Computerized Axial Tomography (CAT) Scan	$270,850
Magnetic Resonance Imaging (MRI) Scan	$273,601
Total	$1,375,571

Exhibit 4
	A: Breakdown of Overhead Expenses
Type of Overhead Cost	Cost
Direct Labor Related Overhead	721392
Equipment Related Overhead	1261036
Total Overhead	1982428
B: Utilization of Equipment by Service
	Run Time Hours / Year
Services
Projectional Radiographs	1060
Fluoroscopies	1312
Computerized Axial Tomography (CAT) Scan	1394
Magnetic Resonance Imaging (MRI) Scan	2515
			Exhibit 5 Additional Information Required for Cost System Proposed by Consultant
A: Breakdown of Equipment Related Overhead
Type of Overhead Cost		Cost
High Tech Equipment Related Overhead		921793
Low Tech Equipment Related Overhead		339243
Total Equipment Related Overhead		1261036
B: Utilization of High- and Low- Tech Equipment by Test
Test	High-Tech Utilization (Hours)	Low-Tech Utilization (Hours)
Projectional Radiographs	268	792
Fluoroscopies	579	733
Computerized Axial Tomography (CAT) Scan	819	575
Magnetic Resonance Imaging (MRI) Scan	2515	0
Total	4181	2100

Question

a) Based on the information provided in Exhibit 5, Calculate the cost allocation rates under the three-pool costing system. -The cost allocation rate for high-tech equipment-related O/H is: -The cost allocation rate for low-tech equipment-related O/H is:

b) Based on the information provided in Exhibit 5 and your answers for Question c), allocate the overhead costs based on the three-pool costing system.

Service	DL $ Per Test	Labor-O/H	High Tech O/H	Low Tech O/H	Total Cost
Projectional Radiographs	417073	?	?	?	?
Fluoroscopies	414047	?	?	?	?
CAT Scans	270850	?	?	?	?
MRI Scans	273601	?	?	?	?
Total	1375571	?	?	?

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