Deliverable 4 – 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 (A–I) 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:

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.