Case1 DubaiM edicalCenter

DubaiM edicalCenteroperatesageneralhospital.T hem edicalcenteralsorentsspaceand bedsto

separately ow ned entitiesrenderingspecialized services,suchasP ediatricsand P sychiatricCare.
DubaiM edicalCenterchargeseachseparateentity forcom m onservices,suchaspatients'm ealsand
laundry,and foradm inistrativeservices,suchasbillingsand collections.S paceand bed rentalsarefixed
chargesfortheyear,based onbed capacity rented toeachentity.DubaiM edicalCentercharged the
follow ingcoststoP ediatricsfortheyearended June30,20x1:

DuringtheyearendedJune30,20x1,P ediatricscharged eachpatientanaverageof$300 perday,had a

capacity of60 beds,and had revenueof$6 m illionfor365 days.Inaddition,P ediatricsdirectly em ployed
personnelw iththefollow ingannualsalary costsperem ployee:supervisingnurses,$25,
000;nurses,
$20,
000;and aides,$9,
000.
DubaiM edicalCenterhasthefollow ingm inim um departm entalpersonnelrequirem ents,based ontotal
annualpatientdays:

P ediatricsalw aysem ploysonly them inim um num berofrequired personnel.S alariesofsupervising

nurses,nurses,and aidesarethereforefixed w ithinrangesofannualpatientdays. P ediatricsoperated
at100 percentcapacity on90 daysduringtheyearended June30,20x1.Adm inistratorsestim atethat

onthese90 days,P ediatricscould havefilled another20 bedsabovecapacity.DubaiM edicalCenterhas

anadditional20 bedsavailableforrentfortheyearendingJune30,20x2.S uchadditionalrentalw ould
increaseP ediatrics'fixed chargesbased onbedcapacity. (Inthefollow ingrequirem ents,ignoreincom e
taxes.)
R equired:
1. Calculatethem inim um num berofpatientdaysrequired forP ediatricstobreakevenforthe
yearendingJune30,20x2,iftheadditional20 bedsarenotrented.P atientdem and isunknow n,
butassum ethatrevenueperpatientday,costperpatientday,costperbed,and salary ratesw ill
rem ainthesam easfortheyearendedJune30,20x1.
2. Assum ethatpatientdem and,revenueperpatientday,costperpatientday,costperbed,and
salary ratesfortheyearendingJune30,20x2,rem ainthesam easfortheyearended June30,
20x1.P repareascheduleofP ediatrics'increaseinrevenueandincreaseincostsfortheyear
endingJune30,20x2.Determ inethenetincreaseordecreaseinP ediatrics'earningsfrom the
additional20 bedsifP ediatricsrentsthisextracapacity from DubaiM edicalCenter.

Case2 Earthand A rtistry Inc.

Earthand Artistry,Inc.providescom m erciallandscapingservices.S ashaCairns,thefirm 'sow ner,w ants
todevelopcostestim atesthatshecanusetopreparebidsonjobs. Afteranalyzingthefirm 'scosts,
Cairnshasdeveloped thefollow ingprelim inary costestim atesforeach1,
000 squarefeetoflandscaping.

Cairnsisquitecertainabouttheestim atesfordirectm aterialand directlabor. How ever,sheisnotas

com fortablew iththeoverhead estim ate. T heestim ateforoverheadisbased ontheoverhead costs
thatw ereincurred duringthepast12 m onthsaspresented inthefollow ingschedule.T heestim ateof
$18 perdirect-laborhourw asdeterm ined by dividingthetotaloverheadcostsforthe12-m onthperiod
($648,
000)by thetotaldirect-laborhours(36,
000).

Cairnsbelievesthatoverhead isaffected by totalm onthly direct-laborhours.Cairnsdecided toperform

aleast-squaresregressionofoverhead (O H)ontotaldirect-laborhours(DL H). T hefollow ingregression
form ulaw asobtained.

R equired:
1. T heoverhead ratedeveloped from theleast-squaresregressionisdifferentfrom Cairns'
prelim inary estim ateof$18 perdirect-laborhour. Explainthedifferenceinthetw ooverhead
rates.
2. U singtheoverhead form ulathatw asderived from theleast-squaresregression,determ inea
totalvariable-costestim ateforeach1,
000 squarefeetoflandscaping.
3. Cairnshasbeenaskedtosubm itabid onalandscapingprojectforthecity governm ent
consistingof60,
000 squarefeet.Cairnsestim atesthat40 percentofthedirect-laborhours
requiredfortheprojectw illbeonovertim e.Calculatetheincrem entalcoststhatshould be
includedinany bid thatCairnsw ould subm itonthisproject.U setheoverhead form uladerived
from theleast-squaresregression.
4. S hould m anagem entrely ontheoverhead form uladerived from theleast-squaresregressionas
thebasisforthevariableoverheadcom ponentofitscostestim ate? Explainyouransw er.
5. Afterattendingasem inaronactivity-based costing,Cairnsdecided tofurtheranalyzethe
com pany'sactivitiesandcosts.S hediscoveredthatam oreaccurateportrayalofthefirm 'scost
behaviorcould beachievedby dividingoverheadintothreeseparatepools,eachw ithitsow n
costdriver. S eparateregressionequationsw ereestim ated foreachofthecostpools,w iththe
follow ingresults.

Assum ethat5 direct-laborhoursw illbeneeded tolandscapeeach1,

000 squarefeet,regardless
ofthespecificplantingm aterialused.
a) S upposethelandscapingprojectforthecity w illinvolveseedingall60,
000 squarefeet
ofturfand planting80 treesand shrubs.Calculatetheincrem entalvariable overhead
costthatCairnsshould includeinthebid.
b) R ecom putetheincrem entalvariableoverheadcostforthecity'slandscapingproject
assum inghalfofthe60,
000-square-footlandscapingareaw illbeseeded andtherew ill
be250 individualplantings.T heplantingsw illcovertheentire60,
000-square-footarea.
c) c. Briefly explain,usingconceptsfrom activity-basedcosting,w hy theincrem entalcosts
differinrequirem ents(a)and (b).