Health Services Resource Management
Assignment 2

Due: 27 October 2014
45 Marks
Important: You must show all calculations and explain how you got all your answers. For example, suppose a question asks what the profit will be in a particular month and you put “$50,000”. Even if this is correct you will receive no marks if you do not show how you got the answer.
There is no need for footnotes or references unless you quote directly from a source. But it is essential that the work is your own.
Question 1 (10 marks)
Regional Healthcare Centre provides a range of healthcare services to the local community. Among other services, the centre provides home visits by nurses to elderly patients. An allied health worker, who performs a range of tasks such as housework and showering of patients, accompanies the nursing staff. When the nurses are not visiting patients, the allied health staff members work at the office doing related administration work.
Each year, the centre receives a budget allocation from the state government’s department of health. The objective of the program is to enable the elderly to remain in their own homes for as long as possible. The department does not allow the centre to spend more than this allocation. The centre, in turn, allocates its budget among its various programs. The visiting nurse program was approved and allocated $250,396 in 2007 and $279,476 in 2008 as follows:

The nursing staff received a 5 per cent increase in salary one-third of the way through 2008. The allied health workers did not receive an increase in wages in either year. The prices of medical supplies increased about 2 per cent during 2008. The prices of cleaning supplies were relatively constant across the two years. Transportation is provided by the nurses, who are reimbursed 20 cents per kilometre. The clinic’s general overhead is allocated to programs on the basis of budgeted program salaries.

Required
a. Compare the results for 2007 and 2008. Does it appear that the financial performance has improved in 2008? Explain your answer.
b. If you were the general manager of the centre, what would you like to discuss with the head of the visiting nurse program concerning the 2008 results? Explain.
c. If you were the head of the visiting nurse program, how would you respond to the concerns raised in (b) above?

Question 2 (5 marks)

Mercy Hospital uses an individual costing system for all patients who have surgery – ie every patient is individually costed. The hospital uses a budgeted overhead rate for allocating overhead to patient stays. In March, the operating room had a budgeted allocation base of 1,000 operating hours. The budgeted operating room overhead costs were $66,000.
Patient Dwight Schuller was in the operating room for four hours during March. Other costs related to Schuller’s four-hour surgery include:
The cost of doctors is not included because doctors bill patients separately from the hospital billing system.

a. Explain why the hospital uses an individual or‘job’ costing system instead of a process costing system.
b. Determine the budgeted (estimated) overhead rate for the operating room.
c. Determine the total cost of Schuller’s four-hour surgery.

Question 3 (7 marks)
A private hospital has three potential capital investment projects for which the cash flows are as follows in thousands of dollars. The directors of the hospital use 12 per cent as the discount rate for all capital investment projects. They also prefer projects which have a payback period of less than three years.

a. Calculate the payback period, the net present value and internal rate of return for each project.
b. Rank the projects and advise the directors which projects, if any, to accept. Give your reasons. Would you reject any project? Give reasons for your answer.
c. Would your answer be different if the projects were independent or mutually exclusive? Explain.

Question 4 (15 marks)
The following table gives the operating budget for a department in a hospital.
Budget Actual Variance
Number of patients 10,000 9,560
Patient fees 1,750,000 1,242,800
Variable Expenses
Salary and wages 758,662 872,222
Administration 4,500 1,700
Repairs and maintenance 5,600 8,300
Food 14,000 13,000
Drugs 36,000 49,500
Electricity 5,000 6,500
Clinical supplies 18,500 18,700
Telephone 4,800 4,850
Miscellaneous expenses 3,500 5,000
Total variable expenses 850,562 979,772
Fixed expenses
Insurance 5,500 7,800
Rent 10,500 11,700
Council rates 6,500 6,500
Depreciation expenses 18,000 18,000
Office overheads 35,000 35,000
Total fixed expenses 75,500 79,000
Total expenses 926,062 1,058,772

Net income 823,938 184,028

Required:
1. You are asked to prepare a budget variance report – remember that you must compare like with like.
2. From your variance report what variances do you consider to be significant? Why?
3. Suggest some reasons why these variances may have occurred. For example, how can there be a variance in some fixed costs when fixed costs are not supposed to change with patient numbers?
4. What corrective action would you suggest?

Question 5 (8 marks)

Assume a medical practice only does two types of executive physical examinations – long and short examinations, which (ignoring lab tests) consist of three separate activities:
Patient check in
Physical examination
A written report on both types of examinations.

A receptionist do
es the patient check-in and she is paid $40,000 per year. Two doctors are employed to do the physical examinations and they are paid $150,000 each per year. A nurse is paid $75,000 per year to write up the reports. Other practice overheads such as rent, cleaning, insurance and office costs are $100,000 per year.
There are 500 long exams and 1,500 short exams conducted during the year. Long exams take 2 hours and one hour for the report. Short examinations take one hour and 30 minutes for the report. Both long examination and short examination patients take the same time to check-in.

1. Initially it was thought that it would be simpler to charge the same price for both long and short examinations. On this basis, what fee would this practice have to charge for examinations if it was to cover all its costs?

2. Patients who received short examinations then complained that they were being charged too much. So it was decided to charge for examinations on the basis of what it cost to provide them, in terms of staff time involved. It was decided to allocate overheads equally to all examinations irrespective of whether they were short or long. What would the practice then have to charge for short and long examinations, if they were to reflect the actual cost of providing them, and if they were to cover all the costs of the practice? Verify that your fees for the long and short examinations do cover all the costs.

3. Suppose the practice aims to make a $50,000 profit. What fees should it charge for long and short examinations? Explain your answer.