Includes Supplements 9, 10, 11

1
Chapter 23

• Includes Supplements 9, 10, 11
• Accounting Version

2
Supplement Nine

• Using linear regression to separate fixed and
  variable labor costs

3
Graph of Cost Equation y a bX
Y Costs
Variable Costs
Total Costs
Fixed Costs
X Workunits
4
Example
Separate total labor costs into fixed and
variable labor components
5
Microsoft Excel

• From the menu select
• Tools
• Data analysis
• Regression
• Y range is total dollars
• X range is total work units
• Okay

6
Regression Output
Intercept is fixed costs, X variable 1 is
variable cost per unit.
7
Cost Equation
Y 460.10 3.73X A lab test with 5 RVUs would
have a standard labor cost of 5 x 3.73 18.65
8
Supplement Ten
Determined with RVU methodology
Determine by pulling invoices for materials
Will be determined through the use of an overhead
rate after service department costs have been
allocated to revenue departments
9
Overhead Expense
10
Overhead Allocation Methods

• Direct allocation method
• Sequential step-down method
• Double apportionment method
• Reciprocal method

11
Double Apportionment
12
First Allocation
Allocate this amount to individual products using
an overhead rate
Unlike the sequential method, we allocate costs
to all other departments in the first allocation.
13
Second Allocation
The second time through, we only allocate to
departments to the right, similar to the
sequential or step-down method.
14
Supplement Eleven

• Ratio of Costs to Charges (RCC)

15
RCC Steps

• Calculate total department costs including
  allocated overhead
• Calculate total department charges
• Divide department cost by department charges to
  get ratio of costs to charges
• Multiple existing procedure price by RCC to
  determine procedure cost

16
Example
The lab at Community Hospital only performs 5
tests, data for which is shown below
17
Example
The lab does not know the cost of each procedure,
however, total department costs are shown below.
18
Example
First we calculate the ratio of costs to charges
(RCC) 297,000/312,632 95 Then we multiply
the RCC by the current price (as shown on the
next slide) to determine the procedure cost.
19
Example
20
Ratio of Costs to Charges (RCC)

• The fallacy with RCC is that it assumes that
  there was a uniform markup to start with.
• Since charges were not always based on good cost
  data, this may not be true.