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CAMC Session 4.1.

Full costing - Traditional approach

Exercise 1: Full cost using various traditional approaches

Dialysis Assistance Inc. is a full-service dialysis clinic for patients with kidney problems. These patients
cannot be cured, but they can maintain their current quality of life by a dialysis treatment. There are two
types of patients, the hemodialysis patients (HD) and the peritoneal patients (PD). The HD-patients need
more intensive monitoring. They visit the hospital three times a week. Alternatively, PD-patients are
treated at home (once a week) via more simple techniques that use standard supplies. This treatment is
monitored by visits of medical professionals of Dialysis Assistance Inc. The following information is
available with regard to these treatments.

There is a discussion going on about cost allocation. The number of treatments as allocation base is one
option, commonly used by hospitals. Some hospitals also use the direct cost base.
Nevertheless, the alternative is a more detailed analysis of overhead. The general overhead for these
treatments consists of two activities, namely 1) nursing services (with skilled A-level and lower skilled
B-level staff) and 2) specialized dialyzes machine activity. Full-time equivalent and the % of machine
usage are potential allocation bases. Following data is available for analysis.

Nursing activity:

 Specialized dialyzes machine activity: the remaining part of overhead


depreciation on dialyser machines
HD PD
use of machine treatment 95% 5%

Required: using the tables provided next page:

1. Calculate the cost per treatment for HD and PD, using a) the number of treatments as allocation base,
b) the direct costs incurred as allocation base.
2. Calculate the cost per treatment for HD and PD, using the detailed information on overhead. Use full
time equivalent as allocation base for nursing services and % estimate of dialyzer machine usage for
specialized machining.
3. Comment on your solution in questions 1 and 2.

EDHEC Business School | Prepared by Claire Grevet M1BM CAMC 2017-18 1


Answer sheet:
1) Cost per treatment

2) Cost per treatment using a detailed information

EDHEC Business School | Prepared by Claire Grevet M1BM CAMC 2017-18 2


3) Comment on your answer in questions 1 and 2.

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EDHEC Business School | Prepared by Claire Grevet M1BM CAMC 2017-18 3


Exercise 2: Full costing -Traditional approach with Cost pools

Company X manufactures flags and banners in three separate production departments. The principal
manufacturing processes consist of cutting material in the pattern cutting room, and sewing the material
in either the flag or the banner departments.
For the year to 31st July cost centre expenses and other relevant information are budgeted as follows:

Required:

1/ Distinguish between product cost centers and service cost centers.

2/ Use the following statement to prepare a statement calculating the overhead absorption rates for
each machine hour and each direct labour hour for each of the three department units. You should
use bases of apportionment and absorption which you consider most appropriate, and the bases used
should be clearly indicated in your statement.

EDHEC Business School | Prepared by Claire Grevet M1BM CAMC 2017-18 4