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UNIT CODE: CMA202UNIT NAME: COST ACCOUNTINGAssignment One InformationSemester 1 2013Assessment 35%Submission Requirements.This assignment may be submitted at or before Friday Study Week 10.Assignments are to be submitted by one of the following means;DO NOT LODGE BY FAX nor EMAIL nor at LECTURER'S OFFICEKEEP A COPYThe assignment must be lodged on or before the due date indicated in the assignment details. Submit your Assignment using either a PDF or MSWord file format1 . The assignment submitted must be accompanied by a signed student declaration as provided for on the CMA202 Assignment Cover Sheet templates (as provided on Learnline2). The assignment submitted must include the completed coversheet for this unit (as provided on Learnline), placed at the front of the document submitted.1 (Failure to include a signed coversheet may result in your assignment lodgement being rejected.) The assignment must conform to the requirements set out in this assignment The assignment must be lodged online via the CMA202 Learnline Assignment Lodgement link on the CMA202 Learnline site. Ensure your file is named using a file naming convention that allows the lecturer to identify to whom it belongs. Failure to use an acceptable file naming convention may result in your assignment lodgement being rejected. DO NOT LODGE VIA EMAILor FAX - assignments lodged by email or fax will not be accepted. KEEP A COPY - Ensure you have a copy of the assignment lodged. If you have submitted assessment work electronically please make sure you have a backup copy. Assignment lodgements will be acknowledged by the lecturer on the CDU CMA202 Learnline site within 72 hours of receipt. It is the students responsibility to ensure that the lecturer has received (and acknowledged receiving) the assignment. 0245935500Instructions for creating PDF documents and/or combining documents of different formats are provided on the Learnline site. DO NOT use the CDU generic coversheet. Semester 1, 2013 Page 1 of 27 Higher Education, Internal and ExternalCMA202_ASSIGN_113_CASE.DOCXCoversheetThe assignment should be accompanied by a standard assignment cover sheet (provided separately on the CDU CMA202 Learnline site) and preferably be typed. The student declaration must be signed (or acknowledged electronically3)- failure to sign (or acknowledge electronically) the declaration may mean that the assignment will not be accepted. DO NOT USE the generic Assignment Cover Sheet provided by External Student Support (ESS) for the submission of hard copy assignments by external students.Assignment ChecklistAn assignment checklist has been provided on the CDU CMA202 Learnline site,to assist students who wish to ensure that the various submission requirements have been met.FormatThe assignment may be completed manually, or with the use of an electronic spreadsheet, word processing software or with the use of accounting software. Marks may be deducted for illegible or partially illegible papers. If completed using multiple file formats or manually, the documents must be combined into one document, preferably in PDF format4.ResubmissionAs a general rule resubmission of assessment items is NOT possible, however the Lecturer may ask for resubmission if it is deemed appropriate. Details for such resubmission will be made available by the Lecturer if and when the situation occurs.Preparation guidelinesAssignment preparation guidelines are provided on the CDU CMA202 Learnline site.Students are required to comply with these requirements.Assignment preparation and presentation guidelines, instructions on lodgement of the assignment and the required coversheet and declaration, are all provided with and/or separately to this document and are available on the CMA202 CDU Learnline site.FAILURE TO COMPLY WITH THESE REQUIREMENTS WILL RESULT IN YOUR ASSIGNMENT BEING REJECTED WITH SUBSEQUENT LOSS OF MARKS.University Plagiarism policyPlagiarism is the unacknowledged use of material written or produced by others or a rework of your own material. All sources of information and ideas used in assignments must be referenced. This applies whether the information is from a book, journal article, the internet, or a previous essay you wrote or the assignment of a friend. Plagiarism policy is available at: -3175272415000The document has been designed so that student can acknowledge the declaration by selecting an option at the signature space. Instructions for creating PDF documents and/or combining documents of different formats are provided on the Learnline site. Semester 1, 2013 Page 2 of 27Faculty of Law, Education, Business and ArtsHigher Education, Internal and ExternalCMA202_ASSIGN_113_CASE.DOCXEXTENSIONS AND LATE LODGEMENTSLATE ASSIGNMENTS WILL GENERALLY NOT BE ACCEPTED UNLESS AN EXTENSION TO THE DUE DATE HAS BEEN GRANTED BY THE HEAD OF SCHOOL.Exceptions will only be made where assignments are late due to special circumstances that are supported by documentary evidence, and may be subject to a penalty of 4% of assignment marks per day. Partially completed assignments will be accepted with appropriate loss of marks for the incomplete portion.Should students foresee potential difficulties with submission of assessment items, they should contact the lecturer immediately the difficulties come to notice, to discuss suitable arrangements etc for the submission of those assessment times. An Application for Assignment Extension or Special Consideration should be completed and provided to the Head of School, School of Law and Business.This application form, explanation and instructions is available on the CMA202 CDU Learnline course site or direct from Please note that it is now Faculty policy that all extension requests must be approved by the Head of School. The lecturer is no longer able to personally approve extension requests.Leaving a request for an extension, special assessment or special consideration until the last moment, based on grounds that students could have reasonably been able to foresee, may result in the application being rejected. Semester 1, 2013 Page 3 of 27Faculty of Law, Education, Business and ArtsHigher Education, Internal and ExternalCMA202_ASSIGN_113_CASE.DOCXREQUIRED:Each student will take the role of a management accounting consultant and present your analysis and recommendations/conclusions. The paper should be written in fluent grammatical English. It should include a bibliography of referenced sources. Internet resources used should be acknowledged and fully referenced. Copies of internet materials used should be submitted separately (either in MSWord or PDF format) with the final paper. All references and sources must be properly acknowledged. A copy of the final paper should be retained by the author.The case is rich in detail and management accounting issues. Whilst all the information provided is relevant to a greater or lesser extent, students could focus on the Activity Based Costing System and the questions asked. For example exhibits 2 and 3 are peripheral to the expected analysis and are provided to provide some context. Exhibits 4, 7& 8 may be more relevant to the analysis and exhibits 1, 5, 6 and 9 would be the most relevant overall. Student analysis and discussion should focus on the rationale for and impact of the split-cost accounting system, and, conclude with an open-ended discussion of the applicability of the approach to more complex comprehensive health care institutions and/or hospitals.Case Study AnalysisAnalyse the MEEI Case and determine how the MEEI administrators might use the information from the Activity Based Costing System? Written Report or EssayBased on your analysis of the MEEI Case (as per requirement 1), provide a report that answers the following questions: What problems arose with the old per-diem costing system? How would the new Activity Based Costing System remedy these problems? How might it affect management’s decisions in respect to patient mix? What would be the difference between the budgeted 1977 routine care cost of the following procedures under the old accounting method and under the activity based costing system? a cataract operation; a tonsillectomy/adenoidectomy procedure; a laryngectomy and radical neck dissection. What accounts for the differences? Are they significant?Provide a schedule of supporting calculations to support your answer. Where appropriate, calculations should be to three decimal places.Using the hypothetical data given by Ms. Arndt, how could a hospital using a per diem reimbursement lose revenue and how much revenue would it lose? In comparison would MEEI lose revenue using the Activity Based Costing System (the split-cost accounting system)? Provide schedules of supporting calculations to support your answer. These schedules would include a flexible budget based on Ms Arndt’s suggested initial level of hospital activity, the standard cost and standard charge (using the same markup used in Exhibit 5) using both the per diem method and the split-cost (ABC) method, and as a minimum, the three data sets provided in Exhibit 9. Whilst not specifically required, you may find it useful to provide a graph of the outcome of each of the data sets. Where appropriate calculations should be to three decimal places. Research ActivityUndertake research into the relevant literature and provide a report on your findings on how an Activity Based Costing System might be implemented at a less specialised (i.e. general) hospital than MEEI. What kinds of implementation problems do you foresee and how would you avoid them? In reporting on your findings you should; Describe and discuss the design of the Activity Based Costing System. Do other less specialised hospitals have the same design problems? Include in your description of the Activity Based Costing System; a definition of the products and the customers5 implicit in the system; the criteria for choosing cost drivers. What importance or relevance (if any) do you attach to the distinction between procedures and diagnoses? What bearing does this distinction have (if any) on the transferability of the MEEI system? 0386080005 Hint! Consider who is actually paying the bills. Semester 1, 2013 Page 4 of 27Faculty of Law, Education, Business and ArtsHigher Education, Internal and ExternalCMA202_ASSIGN_113_CASE.DOCXThere is no single “right” answer to requirements 2 and 3 this case study, albeit that there are “better” solutions than others. Students should concentrate on the “strength” of their analysis and argument in presenting a solution. A “lesser” solution backed by strong, logical, well researched and well-presented analysis will achieve a similar grade to a “better” solution backed by similarly good analysis.6The paper should be between 2,500 and 4,000 words7. The length of parts 2(a) to (c) is as required to answer the questions and the length of part 3 should be between 1,500 and 2,500 words. The paper may take the form of a report, or an essay. However the form is irrelevant provided that the information required is provided within the limits given.If your report is completed using multiple file formats or manually, the documents must be combined into one document, preferably in PDF format8.-3175645731500ie. It’s the strength of the analysis that will affect the grade and not so much the solution itself. The length of assignment is an indication of the depth of analysis that is required. It does not include appendices or calculations. The length of the assignment is provided only a guide and need not be adhered to exactly. The intention is that students demonstrate that sufficient analysis is undertaken, without excessive workload. Instructions for creating PDF documents and/or combining documents of different formats are provided on the Learnline site. Semester 1, 2013 Page 5 of 27Faculty of Law, Education, Business and ArtsHigher Education, Internal and ExternalCMA202_ASSIGN_113_CASE.DOCXFEASIBLE METHODOLOGY9 IN ANSWERING CASE STUDYRead the case study and the assignment questions carefully and answer only the questions asked. Identify the relevant Management Accounting issues to be addressed in the case study. Identify the relevant facts. Relate the relevant facts to the Management Accounting issues identified (ie. for each relevant fact, answer the question "So What?"). Summarise, form an opinion and/or suggest possible solutions based on your findings related to the relevant facts and issues. Acknowledge all sources accurately and completely. The paper should be properly referenced using a accepted reference technique10 accompanied by an appropriate11 bibliography and literature review. It is important to note that more or excessive work than required is not necessarily seen as better. In many cases, work exceeding the required length will be penalised. Another point to note is that most assignments require you to argue a point of view or to demonstrate how you think about an issue; to, in other words, test your ability to analyse, diagnose, recommend and implement decisions. Many students confuse thinking and writing with collecting descriptive material. Descriptive material is important and indeed essential in most cases; it should be limited however to what is necessary and be in proportion to the other requirements of arguing and thinking. Too much descriptive material, no matter how well presented, does not make a good piece of work. 0423926000For text on how to analyse and report on case studies refer to Sherron C. Swenson, Peter J. Holland, How to Analyse and Write Case Study Reports : A Guide for Business Students : Dunmore Press, Palmerston North, N.Z. 1986. 658.403 SWEN. Use of this text is not necessary but may provide guidance to students unsure of how to proceed with case study analysis. Any generally accepted referencing technique is acceptable however it should be used consistently throughout the paper. Appropriate to the references used and to the size of the paper. Semester 1, 2013 Page 6 of 27 Higher Education, Internal and ExternalCMA202_ASSIGN_113_CASE.DOCXMassachusetts Eye and Ear Infirmary12Mr Charles Wood, Executive Director of the Massachusetts Eye and Ear Infirmary (MEEI), was reviewing the results of a new cost accounting system which the hospital had installed in 1976. The new system contained several innovative features, and the past year had been a trial period for it. Mr Wood was now interested in persuading Medicare and Medicaid to accept the system for reimbursement; Blue Cross had adopted it at the outset of the pilot program.Central to his thinking were two issues:whether the system actually represented a more accurate picture of hospital costs, as proponents of the system claimed; and what impact the system was having on cost containment in the hospital. Wood was also concerned about transferring the system to less specialised hospitals, since his preliminary feedback from the industry indicated that some individuals questioned whether the system was applicable to a general hospital.HISTORY OF THE MASSACHUSETTS EYE AND EAR INFIRMARY (MEEI)In 1974, the MEEI celebrated its 150th anniversary. During the century and a half from its inception in 1824 as a free clinic located on the second floor of Scollay's Building in downtown Boston, it had undertaken a wide variety of innovative and farsighted activities.By 1977, the independent, non-profit hospital was admitting 11,200 patients and accommodating approx. 78,000 outpatient visits per year. More striking was the increased demand on the hospital's emergency care. In a decade, emergency visits surged from 10,000 per year to nearly 36,000. (Exhibit 1 details patient statistics for 1977). In addition, the hospital coordinated numerous community outreach programs, including screening clinics to detect chronic disorders, civic group lectures, and the preparation of health care education booklets.In 1977, a total of 1,100 employees staffed the hospital's three daily shifts. There were 136 eye specialists and 67 ear, nose, and throat specialists on the hospital's staff, and 40 residents and 50 clinical and research fellows received specialty training each year. The hospital's condensed income statement (for all activities, including inpatient, outpatient and special services) is summarised in Exhibit 2. This case will focus on the costs and charges applicable to inpatient hospitalisation and treatment only.034931350012This assignment was adapted from a case that was prepared by David W. Young, Assistant Professor, and Patricia O'Brien, Research Assistant, based on the document entitled "Massachusetts Eye and Ear Infirmary: Interrelated Programs for Optimum Cost Effectiveness in Hospital Management," by Charles T. Wood, and with the cooperation of the Massachusetts Eye and Ear Infirmary.Copyright1978 by Massachusetts Eye and Ear Infirmary and by the President and Fellows of Harvard College.School of BusinessSemester 1, 2013 Page 7 of 27Faculty of Law, Education, Business and ArtsHigher Education, Internal and ExternalCMA202_ASSIGN_113_CASE.DOCXBACKGROUNDDissatisfied with the usual per diem13 cost accounting methods used in hospitals across the country, Charles Wood became convinced of the need for an accounting system that would allow hospitals to measure the cost of health care more accurately. He contended that the historical approach to structuring hospital rates was clumsy and outmoded. Because it failed to identify the components of patient costs, it placed an unfair burden on the patients or payers who could least afford it. According to Mr Wood, the present method was leading hospitals into ineffective and cumbersome accounting methods, at the expense of the public.For years I've been trying to improve the conceptual basis for identifying the cost of hospital care. Back in the 1950s, I noticed that hospitals' costs were defined differently from state to state, depending on what qualified for reimbursement. Meanwhile, hospitals would try to make up for deficits by tacking on additional patient fees for services like admissions. These experiments were short-lived because the figures were arbitrary and not rooted in fact, but they stimulated me to think about hospital costs as units of service. We developed our present cost accounting system gradually; first we developed a two-part rate composed of a per diem charge, including nursing, and a hospitalisation charge. Then, as we improved data systems, we expanded into our present three-part cost accounting method, which takes nursing out of the per diem portion and costs it out for separate charging.Wood designed the new system to isolate specific elements of hospital costs. By breaking down the lump sum per diem hospital rate into units which reflected the actual services each patient received, Wood hoped to develop a more equitable cost system. In addition, he thought the extensive information produced by such a system could provide management tools for improving the use of hospital facilities.Although he designed the system for MEEI's specification, Wood believed it had widespread potential for the hospital industry. In the hospital's 1976 Annual Report, he wrote,We have just completed the first full year of using our new cost accounting system, and I am happy to report that by any measure it is working successfully. Our program continues to be watched very closely by other hospitals around the country and by various local, state, and federal government agencies. Our first-year pilot program with Blue Cross of Massachusetts, Inc., exceeded even our expectations, and I hope to be able to report a year from now that the seeds planted this year have taken root and grown. It is particularly important that this approach be demonstrated in a general hospital, which will almost certainly erase any doubts about widespread potential. I am quite confident in the outcome of such a test because, despite the fact that we are a specialty hospital, we have worked with such a variety of conditions and amassed such a broad collection of data that we are certain of successful use in general hospitals.THE PER DIEM PRICING SYSTEMThe per diem pricing system originally used at MEEI was to divide the total budgeted costs by the total budgeted patient days to establish the per diem cost. The per diem charge rate was determined by adding a 5% profit margin to the per diem cost.THE ACTIVITY BASED ACCOUNTING SYSTEMThe activity based costing system in use at MEEI was built around two basic concepts:that not all days' care in a hospital were equivalent, and that for any given patient, the cost of routine services was a function of three distinct categories of costs that related to three essential elements of a hospital stay -hospitalisation, routine daily costs, and intensity of service (what MEEI calls "clinical care") costs. The hospitalisation cost is the effort of entering and discharging a patient. It includes scheduling for admission, the admission process, and other one-time operations such as maintaining medical records, preparing a bill, and various discharge related activities. It also includes a per-patient apportionment of plant and administrative overhead -in effect, the cost of the hospital's availability and readiness. Hospitalisation is a one-time cost, regardless of a patient's length of stay, and recognises that one's entry and presence in the hospital engender costs that are measurable.The cost per patient day category encompasses the costs related to the patient's length of stay (i.e., the daily costs for room, meals, dietary needs, laundry, routine pharmaceuticals, medical and surgical supplies, and incidentals).-31752800350013per diem;- adverb & adjective for each day.;- noun an allowance or payment made for each day.School of BusinessSemester 1, 2013 Page 8 of 27Faculty of Law, Education, Business and ArtsHigher Education, Internal and ExternalCMA202_ASSIGN_113_CASE.DOCXThe clinical care component is the cost of direct patient care in accordance with diagnosis, surgical procedures, and the patient's point in progress toward recovery. This component relies on the use of clinical care units. A clinical care unit (CCU) is the numerical value given to a direct service or treatment which is provided to a patient. The CCU's are measures of the amount of time necessary to perform various activities in relation to a patient's care while in the hospital.Wood emphasised that the system focussed only on the services which had traditionally been included in a per diem rate.It's important to recognise that our new cost accounting system is not a medical measurement system. It's a cost measurement system for productivity. By means of the data base which we created, we were able to develop what might best be called a relative-value scale. This tells us how many clinical care units are needed for the entire range of procedures here at the infirmary. The data base is updated periodically by sampling various procedures to see how they correspond to the existing data base and making adjustments accordingly. Services such as the operating rooms, drug units, lab tests, and other ancillaries are billed separately so that the system focuses only on the ongoing care component of a patient's stay.MEEI had calculated the amount of effort or clinical care units required by each procedure and came up with a method of specifying the amount of care needed by each patient. Time values for clinical care units are shown in Exhibit 3, and the number of clinical care units necessary for various nursing activities is enumerated in Exhibit 4.USE OF THE ACTIVITY BASED ACCOUNTING SYSTEMWith the activity based costing system, the traditional per diem cost for a patient's stay was allocated to the three aforementioned categories. Expenses are distributed by categories in Exhibit 5. During fiscal year 1977, the infirmary's hospitalisation charge was $212. The daily room rate was $31.50, and clinical care was $5.25 per unit. By using the data base which it had developed, MEEI could predict by diagnosis and surgical procedure how many clinical care units a given patient would be likely to require on each hospital day, from the day of admission to the day of discharge. Wood commented on this approach.We know, for example, that a child with strabismus (squint) will require 15 clinical care units on the day he is admitted. The far more seriously ill laryngectomy patient, who is largely able to care for himself preoperatively, will require only five clinical care units on the day of admission. By means of our data base, we have been able to develop a workload curve by diagnosis and surgical procedure on a day-to-day basis that can be used to predict clinical care requirements of patients in-house and those to be admitted. (See Exhibit 6.)We recognise, of course, that every service provided as part of general clinical care is not a direct patient care service. We know that a portion of the time of every member of a nursing shift is spent in activities other than direct care, activities such as conferences with other members of the medial team, consoling the patient, and so forth. So, in determining the cost of a clinical care unit, we developed a ratio of direct patient care time to indirect patient care time and then included indirect care and nursing department overhead along with direct patient care costs in the cost per clinical care unit.As might expect, we have found that the costs for various procedures under the new system are radically different from those under the traditional system when we simply used a per diem rate. Thus, not only is the new cost accounting system we have put into effect at MEEI a major departure from systems presently being used in hospitals across the country, but it results in significantly different costs for procedures as well. The activity based costing system we are using closely aligns charges with '' diagnosis, surgical procedure, and identified required care. Semester 1, 2013 Page 9 of 27 Higher Education, Internal and ExternalCMA202_ASSIGN_113_CASE.DOCXMargarete Arndt, Director of Patient Services at MEEI, highlighted the differences between the activity based costing system and the traditional per diem system:I think one can appreciate the advantages of our cost accounting system by looking at some hypothetical hospital activities for one year. For example, suppose a given hospital had budgeted for 10,000 admissions during a year, 50,000 patient days, and 700,000 CCUs and set its per diem rate based on this level of activity. Suppose now that patient days decreased to, say, 9,000, while admissions remained the same, or admissions decreased to, say, 49,000, while length of stay remained the same; or suppose there was an increase or decrease in the intensity of care such that more or fewer CCUs were rendered. You could then make comparisons between the hospital using a activity based costing system and one using a per diem rate to see the differences. What happens, of course, is that hospitals using a per diem system lose revenue as soon as patient days fall, while at the same time they may be delivering more intensive care on the existing patient days.EVALUATION OF THE ACTIVITY BASED ACCOUNTING SYSTEMIn reviewing the effects of the new accounting system, Wood first mentioned the advantages of the hospitalisation charge.One of the big differences with our new system is the hospitalisation charge. Compared with the present per diem system in use in most institutions, it has a greater impact on the short-stay patient. But it is nevertheless more equitable, since under the per diem system the long-stay patient (mostly the older and sicker patient likely to be less economically endowed) is paying a proportionately larger share of the one-time costs and is, in fact, subsidising the hospitalisation of the short-stay patient.Wood imagined that, used over a wide geographic area, the system would provide a common denominator to compare rates among several hospitals.The long-argued question of why day rates have varied so markedly from one institution to another over the years is a result of the day rate being a catchall category for many other cost factors. If the true elements of hospitalisation are identified, the cost of providing a hospital room should be markedly closer everywhere in that the same elements are assessed.Wood added a long-range benefit for the health industry.By costing out the elements of care and charging patients only for the care they receive, it will no longer be necessary to operate separate institutions or facilities for patients who require different levels of care. These facilities were created because traditional cost accounting systems are inadequate to measure and cost out the work output for each level of care. I mean, currently, patients recovering from long or serious illnesses are moved from acute care facilities to skilled nursing care wings or to nursing homes because each facility charges different basic rates depending on the amount of care they offer. It makes sense that as patients need less nursing care, they no longer want to pay the same per diem rate they paid during their critical illness. With the activity based costing system, a patient would pay different rates within the same facility as his or her needs became less. In addition to the obvious advantages of convenience to patients and saving administrative duplications, the system allows hospitals to effectively compete with skilled nursing facilities.Arndt pointed out that the system also had a major impact on the hospital's nursing department.One of the real advantages of the activity based costing system is that it has eliminated some unnecessary conflict in our decision making. Barbara Corey (Director of Nursing) no longer has to defend the amount of care she has to deliver. Once we have projected CCUs for the year, the nursing staff requirements are all but self-determined. The nursing department can be in a precarious position in hospitals that operate under per diem systems. It is probably the largest department and would be an easy target when cutting expenses becomes necessary. The average hours per care for nursing day statistics means nothing retrospectively because it reflects the census more than anything else. Further, as the length of stay gets shorter and shorter, all you leave for the acute care institution is the very sick-stay period for each patient. If nursing has to budget on a per diem basis, they lose, because they have no statistics to show how much care they delivered. But the CCUs deal with that problem by separating intensity of care from number of patient days. Semester 1, 2013 Page 10 of 27 Higher Education, Internal and ExternalCMA202_ASSIGN_113_CASE.DOCXCorey reiterated, pointing out the impact of the system on her staffing decisions.Before the activity based costing system, we really never had anything concrete to hang our hat on when it came to asking for additions to staff. While the system can, of course, backfire on you, it does give us a handle on how much time is being spent. The CCUs are based on an eight-hour shift, and we estimate that one nurse can handle about 12,900 CCUs a year. Margarete Arndt can predict pretty closely what our CCU needs are going to be for each fiscal year, and then it is a relatively simple matter for me to determine my staffing needs for the nursing department. Our curve of estimated CCUs is updated periodically. Once a year we study our patients for three months, but that's really the only additional effort involved. We didn't want to get into a process where we concurrently clock every service performed on each patient. Rather, while every patient gets the individual attention he or she may require, patients are billed according to the curve that goes with their procedure.RELATIONSHIP TO THE BUDGETARY PROCESSAccording to Wood, the activity based costing system at MEEI played an important role in the budgetary process.The activity based costing system is a significant tool for stabilising hospital budget forecasts. Presently, hospital administrators have a single figure with which to work: the so-called per diem all inclusive room rate. In this per diem system, unexpected declines in patient days can lead to serious block revenue losses. With the activity based costing system at MEEI, there are three cost categories with a potential for adjustment: per patient revenue from the one-time hospitalisation charge (related to number of admissions), revenue from the daily room rate charge (related to length of stay), and revenue from the clinical care units charge (related to the intensity of clinical care given).With the per diem system, it is extremely difficult to put one's finger on where problems are, and when adjustments are indicated there is a danger that they will be made in the wrong areas. With the activity based costing system, however, with its separate areas clearly identified, we can easily see which areas are affected by changes in volume, and adjustments can be made accordingly.Because each of these categories has a unit measurement which is rather closely aligned to what actually goes on in the hospital, I can more accurately measure the degree to which we are meeting our budget, and when we are over or under budget we can take appropriate action in the area where the variance occurs. The result is that, despite inflation and the uncertainties of running a health care organisation, we are able to operate very close to budget.Anthony Reis, Manager of Fiscal Affairs at MEEI, discussed the impact of the system on budgeting and cost containment.The activity based costing system has allowed us to be more accurate in our budgetary process. Nursing is about 20% of our total payroll dollars, which makes it very significant and which in turn makes CCUs very important. Thus, by building CCUs into the budget process, we are able to have better control over the nursing portion of our budget.It is important to emphasise, though, that the use of CCUs does not automatically trigger decisions; rather, it helps us ask the right question. If CCUs are down, we first try to find out why they are down; then we can make decisions. So we have a better tool than the old patient day thing to try to make better management decisions.When you have a flat room rate that covers all routine services, such as most hospitals do, if patient days go down you might make a decision that you need fewer nurses, which might not be the case at all. Now we can see more clearly how the costs break down. Let's assume, for example, that patient days decrease, but we also see that admissions are the same. This tells us that those services which relate to admissions can't be cut back, but perhaps services such as dietary can be. Next we would look at the CCUs. Just because patient days are going down doesn't mean that CCUs are decreasing also, so we see what's happening; then we decide if we want to cut back on nursing staff. That to me is the most important part, but for the general public, of course, the more important part is fairer billing.As far as the costs and benefits of this system to the hospital are concerned, they are very difficult to measure. However, historically our costs have increased at the rate of the rest of the industry, but now they are increasing by only about 6% to 7% a year compared to 12% to 15% a year for the rest of the industry. Even though we are a specialised hospital, we essentially do everything the same as every other hospital, except, of course, we now group our cost centres into three categories.Thus, because the activity based costing system isolates cost centers and presents a more accurate financial picture of the institution than the accounting system in general use today, it lends itself to more Semester 1, 2013 Page 11 of 27 Higher Education, Internal and ExternalCMA202_ASSIGN_113_CASE.DOCXeffective budget forecasting. Cost centers can be isolated for the predicted number of patient discharges for the coming year, and the accurate figures can be extrapolated for budgeting purposes. Taking this one logical step further, if we can prepare accurate budget forecasts based on this activity based costing system, we then have the credibility and confidence to enter into prospective reimbursement programs with third-party payers.BLUE CROSS REIMBURSEMENTIn 1976 and 1977, Blue Cross was the only third-party payer that reimbursed MEEI according to the activity based costing system. At the end of the year, Paul Bushnell, Manager of the Blue Cross Office of Health Care Planning, reported favourably on the new system and added his intention to renew MEEI's contract using the activity based costing method. According to Bushnell, Blue Cross was supporting the system for two major reasons.First, I would agree with Charley Wood that the new system provided him with better management information to run his hospital. I think this has proven out. This year, his costs and efficiency were far better than the national average. His system did help him hold on to costs; I'd say his argument has merit. Secondly, the system will in the long run save money for Blue Cross, Medicare, and Medicaid. Rather than support a health system with 3,000 to 5,000 empty beds and a proliferation of nursing homes, all of us would benefit by using these beds and ending the duplication of facilities. Currently, the empty beds are probably costing us 70% of the full beds. If we can now provide skilled nursing facility care at reasonable rates in unutilised facilities, we will greatly improve hospital efficiency and save ourselves wasted dollars.Bushnell added one advantage which, he noted, was still highly conjectural. He thought that accommodating patients in one facility for both their acute and skilled-nursing-care needs could possibly hasten some patients' recovery periods. This would represent a savings for the payer, the hospital, and the patient.Like Wood, Bushnell has tried to interest Medicare and Medicaid in the activity based costing method of reimbursement.The state’s reluctance may derive from the fact that their payments would increase, at least initially, under the new system. Because the state sets payment rates from historic cost, they are traditionally less than a hospital's current costs. Using the Massachusetts Eye and Ear's cost accounting system, charges are based on current cost figures. This year, Blue Cross paid an additional $100,000 to MEEI because of our patient mix. We consider this an investment in a more equitable health system and long-range savings. On the other hand, Medicare, because of the types of procedures for which Medicare patients are admitted to the Eye and Ear Infirmary, would pay less to the hospital than under a per diem rate.Average length of stay and volume distributions are classified by payer in Exhibits 7 and 8. Semester 1, 2013 Page 12 of 27 Higher Education, Internal and ExternalCMA202_ASSIGN_113_CASE.DOCXBushnell had also tried to persuade several community hospitals to develop activity based costing systems. He believed that medical and diagnostic data can be standardised as surgical data had at MEEI. He commented on transferring the system to other hospitals.I am talking to several community hospitals because I definitely think they can use an accounting system like MEEI's. It should have been done long ago, but the catch is the work involved in compiling the standard CCU data from historic records. What we really need is someone to put together one cookbook of clinical care units for the various diagnoses done at community hospitals. Besides, if every hospital devises its own clinical care unit structure, there will be no comparability between hospitals.During the first year, Blue Cross paid MEEI the full amount they were billed. Bushnell explained that because MEEI was unique in their costing method, Blue Cross lacked any comparative information for the hospital's CCU estimates. Blue Cross, added Bushnell, trusted the hospital and through their utilisation and review process kept their costs at a minimum.257683013398500 Semester 1, 2013 Page 13 of 27 Higher Education, Internal and ExternalCMA202_ASSIGN_113_CASE.DOCXEXHIBIT 1MASSACHUSETTS EYE AND EAR INFIRMARYPatient Statistics, 1977Inpatient Hospital (174 beds)AdmissionsEye patients7,193ENT* patients4,007*ENT = ear, nose and throat Total admissions11,200OperationsBy eye house staff1,111By eye attending staff6,305Total eye operations7,416By ENT house staff1,123By ENT attending staff2,578Total ENT operations3,701Total operations11,117DischargesDeath6Autopsies performed44%Patient days54,400Average patient census152Average length of stay4.86Bed utilization87%Total discharges11,222Outpatient Department(OPD)Eye clinicTotal eye visits57,655ENT clinicTotal ENT visits20,455Total OPD visits78,110Emergency WardEye cases18,868ENT cases16,512Total35,380Ambulatory SurgeryEye cases2,186ENT cases1,508Total3,694Special ServicesAudiology9,430Electroretinography (tests)900FIuorescein (tests)2,331Otoneurology (tests)466Utrasonography (tests)265Visual function studies-Radiology (exams)30,588LaboratoriesEye pathology (specimens)2,184ENT pathology (specimens)11,355Clinical laboratory (procedures)93,082Bacteriology (cultures)16,1663806190-4285615003806190-4104005003806190-184404000School of BusinessSemester 1, 2013 Page 14 of 27Faculty of Law, Education, Business and ArtsHigher Education, Internal and ExternalCMA202_ASSIGN_113_CASE.DOCXEXHIBIT 2MASSACHUSETTS EYE AND EAR INFIRMARYCondensed Income Account-1977RevenuePatient service revenue$20,901,732Adjustments to patient revenue for uncollectible accounts, free care, and$1,582,873contractual allowancesNet revenue service to patients$19,318,859Other operating revenue$5,866,547Total operating revenue$25,185,406Operating expensesPatient service (including depreciation)$20,887,510Research and other specific purpose direct expenses$4,586,730Hospital operating income/(loss)($288,834)Income from donations$0Hospital net loss from operations *($288,834)3903345-29527500390334512636500390334515113000*It is the express policy of the Massachusetts Eye and Ear Infirmary that charges only recover cost.462915049403000918210500380009182107721600091821010439400091821013157200091821017005300091821019431000091821021863050091821024282400091821026708100092456049403000EXHIBIT 3MASSACHUSETTS EYE AND EAR INFIRMARYTime Values for Clinical Care Units1 unit = 7½ minutes ± 2 minutes2 units = 15 minutes ± 5 minutes4 units = 30 minutes ±5 minutes8 units = 60 minutes ±5 minutes12 units = 90 minutes ± 5 minutesSource M. Poland et al."PETO- A system for assisting and meeting patient care needs."Amer.J. Nursing 70:1479 (July 1970).9182104445000 Semester 1, 2013 Page 15 of 27 Higher Education, Internal and ExternalCMA202_ASSIGN_113_CASE.DOCX6645275631825009080506381750091440063182500EXHIBIT 4MASSACHUSETTS EYE AND EAR INFIRMARYClassification of Patient NeedsCATEGORYDESCRIPTIONCLINICAL CAREUNIT VALUEDietFeeds self without supervision, or family or patent feeds patient1Feeds self with supervision of staff2Tube feeding every three hours by patient4Total feeding by personnel, or instructing the patient or continuous IV, or blood5transfusion.Tube feeding by personnel every three hours.8Tube feedings every 1 to 2 hours12ToiletingToilets independently0Toilets with minimal assistance1Toilets with supervision, or specimen collection, or uses bedpan. Hemovac output.2Up to toilet with standby supervision, or output measurement every hour.1Initial hemovac setup.4Vital signsRoutine-daily temperature, pulse and respiration1Vital signs every 4 hours2Vita1 signs monitored, or vital signs every 2 hours4Vital signs and observation every hour, or vita1 signs monitored, pIus neura check8Blood pressure, pulse, respiration, and neuro check every 30 minutes12Respiratory needsBedside humidifier, or blow bottle1Mist or humidified air when sleeping, or cough and deep breathe every 2 hours2Continuous oxygen, trach mist, or cough and deep breath eevery hour4IPPB with supervision every 4 hours8SuctionRoutine postoperative standby1Nasopharyngeal or oral suction pm2Trachewstomy suction every 1-2 hours4Tracheostomy suction every half hour8BathBathes self, bed straightened1Bathes seIf with help, or supervision, daily change of bed2Bathed and dressed by personnel or partial bath given, daiIy change of linen4Bathed and dressed by personnel, special skin care, occupied bed8ActivityUp with assistance once in 8 hours (or exercise)1Up in chair with assistance twice in 8 hours or walking with assistance2Bedrest with assistance in turning every 2 hours or up walking with assistance of two4persons twice in 8 hoursBedrest with turning every hour 121 Semester 1, 2013 Page 16 of 27 Higher Education, Internal and ExternalCMA202_ASSIGN_113_CASE.DOCX66452756324600091440063246000TreatmentsOnce in 8 hours1Twice in 8 hours2Three times in 8 hours4Four times in 8 hours8More than every two hours12Source: M. Poland et al., "PETO-A system for assisting and meeting patient care needs." Amer. I. Nursing, 70:1479 (July 1970).-57154572000 Semester 1, 2013 Page 17 of 27 Higher Education, Internal and ExternalCMA202_ASSIGN_113_CASE.DOCXEXHIBIT 5MASSACHUSETTS EYE AND EAR INFIRMARYClassification of ExpensesFiscal Year 1977Cost Per Patient AdmissionBudgetedAdmitting & scheduling$36,409fixedAccounts receivable & cashier$65,091fixedPatient services$17,600variableProperty insurance$23,943fixedLegal expenses$2,261fixedSocial service$163,321variableMedical records & library$185,302fixedRepairs & maintenance$317,148fixedOperation of plant$251,276fixedHousekeeping$511,523variableInterest & depreciation$677,549fixedFree care & bad debts$10,977variableTotal cost$2,262,400Admissions11,200Cost per patient$202.00Charge per patient$212.00Cost per Patient DayHouse officers$164,928fixedMedical and Surgical supplies$342,312variableDietary$702,609variableLaundry & Linen$216,314variablePharmacy$151,842variableFree care & bad debts$7,595variableTotaI cost$1,585,600Patient days54,400Cost per patient day$29.15Charge per patient day$31.50Cost per CCUNursing service-direct cost$2,052,914variableNursing ed.-direct cost$415,986fixedNursing Admin. and Supervision$1,133,537fixedNursing maint. of plant$11,849fixedNursing operation of plant$9,386fixedNursing housekeeping$9,194variableNursing laundry & linen$1,251variableNursing café$91,843variableNursing depreciation & interest$25,698fixedFree care & bad debts$16,342variableTotal cost$3,768,000CCU753,600Cost per CCU$5.00Charge per CCU$5.25 Semester 1, 2013 Page 18 of 27 Higher Education, Internal and ExternalCMA202_ASSIGN_113_CASE.DOCXEXHIBIT 6MASSACHUSETTS EYE AND EAR INFIRMARYSample Distribution of Clinical Care UnitsPOSTOPERATIVE DAYS (excluding day of disPROCEDUREDay ofDay of Surgery1st2nd3rd4th5th6th7th8thAdmissionTonsillectomy and Adenoidectomy324Cataract extraction151814106Laryngtectomy and radical neck dissection565036342817171412Mastoid tympanoplasty41721137Scleral buckle, primary15181388886Vitrectomy pars plana1517211313131311Strabismus surgery159Sybmucous resection317Laryngoscopy and Laryngoscopy and vocal cord strip910Corneal transplant152119161212124761230-2094865005054600-2094865006222365-2094865004761230-1732280005054600-1732280004761230-1559560005054600-1559560006222365-1559560004761230-1386205005054600-1386205006222365-1386205004761230-1214120005054600-1214120004761230-1041400005054600-1041400006222365-1041400004761230-868045005054600-868045006222365-868045004761230-695960005054600-695960004761230-523240005054600-523240006222365-523240004761230-349885005054600-349885006222365-349885004761230-177800005054600-177800006222365-17780000* Room charges apply for each overnight stay, with surgery normally scheduled for the day after admission. Day of Discharge is the final day of care and Semester 1, 2013 Page 19 of 27 Higher Education, Internal and ExternalCMA202_ASSIGN_113_CASE.DOCX184277046736000571690546736000183642047371000EXHIBIT 78331204445000MASSACHUSETTS EYE AND EAR INFIRMARY8331204445000Average Length of Stay by Financial Class8331204445000Fiscal Year 1977DaysSelf-pay6.19Blue Cross of Massachusetts4.01Out-of-state Blue Cross6.26Commercial insurance4.34Workmen's Compensation6.25Welfare (Medicaid)4.31Medicare5.6451816026860500EXHIBIT 8MASSACHUSETTS EYE AND EAR INFIRMARYVolume Distribution by Financial ClassFiscal Year 1977DischargesPatient Days Clinical Care UnitsSelf-pay6.24%7.81%7.99%Blue Cross of Massachusetts28.44%23.09%23.23%Out-of-state Blue Cross7.36%9.32%9.00%Commercial insurance18.47%16.23%16.44%Workmen's Compensation1.12%1.41%1.51%Welfare (Medicaid)6.25%5.45%5.41%Medicare32.12%36.68%36.40%Net Income per category (actual) (all$2,363,423$1,706,005$3,940,058financial classes) Semester 1, 2013 Page 20 of 27 Higher Education, Internal and ExternalCMA202_ASSIGN_113_CASE.DOCX195834047371000EXHIBIT 9MASSACHUSETTS EYE AND EAR INFIRMARYPRACTICAL CAPACITY FOR FLEXIBLE BUDGETADMISSIONS10,000PATIENT DAYS50,000CCUs700,000Data Set 1ADMISSIONS10,000PATIENT DAYS47,00048,00049,00050,00051,00052,00053,000CCUs700,000Data Set 2ADMISSIONS7,0008,0009,00010,00011,00012,00013,000PATIENT DAYS50,000CCUs700,000Data Set 3ADMISSIONS10,000PATIENT DAYS50,000CCUs400,000500,000600,000700,000800,000900,0001,000,000960755-541909000960755-2087245002782570-208724500960755-1915795002794635-191579500960755-1585595002794635-158559500960755-1414145002782570-141414500241109572136000 Semester 1, 2013 Page 21 of 27 Higher Education, Internal and ExternalCMA202_ASSIGN_113_CASE.DOCX628650360489500628650393890500633730359918000CMA202 - ASSESSMENT RUBRIC ASSIGNMENT S1 20The following rubrics/comments should provide you with a guide on how the Assignment will be assessed. The range of grades will be:HDDC85%-100%75%-<85%65%-<75%50Preparation - 2.5%Assignment presentationAssignment presented inAssignment generallyIn some respects theIn a few resshould comply with theaccordance withpresented in accordanceassignment has beenassignmenrequirements set out in theinstructions and guidelines.with instructions andpresented in accordancepresented iAssignment Details and onguidelines.with instructions andwith some iLearnline.- A few requirements notguidelines, but severalguidelines,- Font, margins and linemet.requirements not met.requiremenspacing;- Coversheet andDeclaration;- File Format;- File naming convention;- Lodgement.General Format - 2.5%StructureVery strong introduction,Introduction, conclusion andIntroduction, conclusion areSome orgaconclusion and topictopic sentences are evidentlimited. Use of topicapparent: isentences. Strongly logicaland appropriate. Logicalsentences demonstratesconclusion,sequence of ideas. Strongsequence of ideas.some control of ideas.sentencesconnections betweenConnections betweenConnections betweenor incomplestatements and evidence.statements and evidencestatements and evidencemake the care clear.are not always clear.between stevidence.Continued on next page...-63507429500 Semester 1, 2013 Page 22 of 27 Higher Education, Internal and ExternalCMA202_ASSIGN_113_CASE.DOCX628650360489500628650393890500633730359918000CMA202 - ASSESSMENT RUBRIC ASSIGNMENT S1 20The following rubrics/comments should provide you with a guide on how the Assignment will be assessed. The range of grades will be:HDDC85%-100%75%-<85%65%-<75%50MechanicsGrammar, correct formForm, punctuation, andOccasional errors in, form,Form, punc- Grammar(headings, indentationsspelling mostly error free.punctuation, and spelling;spelling err- Spellingetc); spelling, punctuationSome closer proofreadingsometimes distracting.distracting.(capitalization, apostrophes,needed.Some additional editing andcommas, colons,proofreading is warranted.semi-colons etc.) error-free.The report has clearly beensuccessfully edited andproofread beforesubmission.FACTS and CALCULATIONS - 15%VocabularyBroad and fluent range ofMostly correct use ofAdequate vocabulary range;Narrow ranvocabulary; elaboration,accounting specificmore precise use of wordsor words usdetail and clarity achievedvocabulary. Clarity ofincluding subject accountinginappropriathrough appropriate wordideas expressed throughvocabulary needed at timessome accochoices, includingappropriate use ofto enhance clarity.vocabularysophisticated use ofvocabulary in a variety ofaccounting specificsituations.vocabulary.Research and dataEvidence of broad,Evidence of controlled andEvidence of good researchResearch cacquisitionsystematic and creativesystematic research.skills. Demonstratesdemonstratresearch. Selection ofDemonstrates selection ofselection of credible,collect credrelevant data goes beyondcredible, relevant data.relevant data. Information isrelevant dathe mainstream literature,Information is gatheredgathered from a good rangeInformationtutorial notes, and textbook.from quality literature,of electronic anda limited rtutorial notes, and textbook.non-electronic sources.electronic anon-electro Semester 1, 2013 Page 23 of 27 Higher Education, Internal and ExternalCMA202_ASSIGN_113_CASE.DOCX628650360489500628650393890500633730359918000CMA202 - ASSESSMENT RUBRIC ASSIGNMENT S1 20The following rubrics/comments should provide you with a guide on how the Assignment will be assessed. The range of grades will be:HDDC85%-100%75%-<85%65%-<75%50Topic DevelopmentFull and rich development:Clear and completeTopic development isTopic devefocus, relevance,development of content;unclear, unfocused orincompleteexplanations and supportclear focus, relevantlacking depth. Supportinginadequateshow sophistication inexamples, thoughtfulinformation andrelevance ithinking and approach.explanations demonstrateexplanations demonstratecontrolled approach.some understandings.Continued on next page...Application of dataDemonstrates skilful use ofDemonstrates consistentDemonstrates an attempt toDemonstrahigh quality, credible,use of credible, relevantuse credibleuse datarelevant data to supportdata to support ideas,and/or relevant data toto support iideas, arguments,arguments, conclusions andsupport ideas, arguments,arguments,conclusions andrecommendations.conclusions andrecommenrecommendations.Critical elements of therecommendations. Criticaldesign demAll elements of themethodology or theoreticalelements of themisunderstmethodology or theoreticalframework are appropriatelymethodology or theoreticalmethodologframework are skilfullyapplied, however, moreframework are missing,framework.applied.subtle elements are ignoredincorrectly developed, oror unaccounted for.unfocused. Semester 1, 2013 Page 24 of 27 Higher Education, Internal and ExternalCMA202_ASSIGN_113_CASE.DOCX628650360489500628650393890500628650807021500633730359918000CMA202 - ASSESSMENT RUBRIC ASSIGNMENT S1 20The following rubrics/comments should provide you with a guide on how the Assignment will be assessed. The range of grades will be:HDDC85%-100%75%-<85%65%-<75%50Analysis ofExamines the evidence andAccurately interprets aAccurately interprets mostMisinterpredata/sources/evidencesource of evidence;range of evidence: egevidence. Evaluates someevidence.questions its accuracy,statements, graphics,alternative points of view.Ignores orprecision, relevance,images etc.Maintains views based onevaluates ocompleteness. AccuratelyOffers analyses andevidence and reason.alternativeinterprets a range ofevaluations of obviousRegardlessevidence: eg. statements,alternative points of view..or reasonsgraphics, charts, primary,Follows where evidencedefends viesecondary, media.and reasons lead.self-interesThoughtfully analyses andpreconceptevaluates major alternativepoints of view.Justifies key results andprocedures, explainsassumptions and reasons.Fair-mindedly follows whereevidence and reasons lead.Continued on next page...BIBLIOGRAPHYand REFERENCING - 5%-63504445000 Semester 1, 2013 Page 25 of 27 Higher Education, Internal and ExternalCMA202_ASSIGN_113_CASE.DOCX628650360489500628650393890500633730359918000CMA202 - ASSESSMENT RUBRIC ASSIGNMENT S1 20The following rubrics/comments should provide you with a guide on how the Assignment will be assessed. The range of grades will be:HDDC85%-100%75%-<85%65%-<75%50ReferencingDirect quotation usedDirect quotation is used andSome overuse of the wordsOveruse ofsparingly; good synthesis ofsynthesis of knowledgeof others. Referencing is ator ideas whknowledge demonstrated.demonstrated. Mostlytimes inconsistent orinconsistenConsistent and accurateaccurate referencingdemonstrates ability toinaccuratelreferencing useddemonstrates an ability toreference only some sourceSome acknthroughout, showing abilityreference a variety oftypes accurately (books,texts consuto reference a range ofsource types (books,chapters in books, journalbibliographsource types (books,chapters in books, journalarticles, conference papers,chapters in books, journalarticles, conference papers,newspapers, lecture notes,articles, conference papers,newspapers, lecture notes,reports, internet pages).newspapers, lecture notes,reports, internet pages).Words, but not always thereports, internet pages).Ideas and words of othersideas of others areIdeas and words of othersare acknowledged.acknowledged.acknowledged. Semester 1, 2013 Page 26 of 27 Higher Education, Internal and ExternalCMA202_ASSIGN_113_CASE.DOCX
Solution: Solving case study activity-based costing