Costing and Decision Making

Competency

Analyze cost behaviors and production costing methods.

Scenario

Community Hospital is considering offering a new clinic for hospital employees and their dependents. The Accounting Manager would like you to assist with a review of cost assignments within the cost accounting system for a new service that is being considered. They review the following new service and cost with you.

There will be a manager hired to oversee the operations of the new service at a salary of $6,000 per month. Technical staff will be scheduled on an as-needed basis, based on number of tests done, and will be paid $25.00 per hour. In addition, there will be one new full-time unit secretary at $15.00 per hour. A maintenance contract has been purchased to cover any needed repairs on the equipment at a cost of $10,000 for 12 months. Office supplies generally run about the same each month, and are roughly $100. Each test requires approximately the $75 of testing supplies. The office rent is $1,000 per month for the first year and then increases to $1,200 for the second year. Electricity to run all of the office equipment is expected to be $750 per month. Travel expenses for the manager will be $150.

Instructions

The Accounting Manager would like you to first create a Word document where you describe the characteristics of direct vs. indirect expenses and variable vs fixed expense. Following your discussion, you should create a table to classify each cost item (AI) as:

1. Direct or indirect (D or I)

2. Variable or fixed (V or F)

She has asked you to prepare a table in Word with the following information:

You will have two answers (D or I; V or F) for each of the following items:

Cost Item D or I V or F

3. Department Manager

4. Technical Staff

5. Unit Secretary

6. Maintenance Contract

7. Office Supplies

8. Testing Supplies

9. Office Rent

10. Electricity

11. Travel Expenses

Finally, in your document, the Accounting Manager would like to know if there are any other assumptions that you have made in making your selections in the table.

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