Clearwater Hospital Case Study

Clearwater Hospital Case Study

For:

Professor Winston Marcellin

BACC 4008

Advanced Managerial Accounting II

Wednesday, March 7th, 2018

Introduction:

The administrator of Clearwater Hospital is presently frustrated as a result of uncontrolled monthly costs. To maintain profitable, the hospital has increased their price of tests, which resulted in numerous complaints from customers and some bills left only partially paid. Apparently, any further increase in price will only drive customers away so it is imperative for the hospital administrator to help control costs. As a consulting group, we will perform a thorough cost analysis and evaluate performance of employees to identify reasons of the high cost of tests.

Problem Identification:

1) Unclear Credit and Collections Policy. - Insurance companies and government health units are only paying 80% of what we bill.

2) Communication Issue - A lot of unsolved complaints about the last increase.

3) Internal control policy and procedures on purchase Issue - 16,000 Small glass plates were purchased with a 4% purchase discount. The total cost is $38,400 - which means that it is $2.40 per plate. Is the 4% purchase discount because of large quantity purchase, promotion or poor quality?

4) Issue on waste of materials - 2,700 smear and 900 blood tests were performed in the lab last month. 3,600 tests were performed in total. 2,000 plates were unused at end of the month so 14,000 plates were used out of the 16,000 plates bought. This means: 14,000/3,600=3.89 plates per test. Ideally, it should be one plate per test. Why were so many glass plates wasted? 1, Has some breakage of the glass plates occurred? Poor quality or glass plates are just easily broken? 2, Had those tests been re-run several times because of unskilled workers?

5) Issue on assigning work hours to employees - 1,800 hours of labour time were used in performing both tests. This is 550 hours more than the national standard. The cost of labour time was $18,450. $18,450/1,800 hours = $10.25/hour. The standard is at $12. Have the hospital assigned enough time and cost to skilled workers? Or have the hospital hired enough experienced workers?

6) Issue on using average cost system - 3,600 tests/1,800 hours = 2 tests per hour or 0.5 hour per test. Are we spending too much time on the test? How is this information allocated according to the two different tests? The hospital can not identify how much time spent on each smear and blood test which may lead test cost distortion.

7) High variable overhead cost - The lab’s total amount of variable overhead cost was $11,700 in previous month. 11,700/3,600=$3.25 per test. 11,700/1,800=$6.50 per hour. $0.50 more than the national standard. Can we reduce variable overhead cost?

8) Fixed overhead cost higher than standard - Fixed overhead cost last month totalled $10,400. The national standard is $10,000($8.00*1250 Hrs) per month for total fixed overhead cost. It is slightly higher than national standard. Where are these fixed costs coming from? Can we reduce fixed overhead cost? But at what price? For example, can we find another place with lower rent to run the lab?

Assumptions/ Standards:

Only smear test and blood test are performed in the lab.

Plates: 3 plates per lab test

Cost $2.50 each

Single use

Labour:

Time - Each smear test : 0.3 hours

Each blood test : 0.6 hours

$12.00 per labour hour

Overhead - cost driver : Direct Labour

Denominator:

1,250 hours per month

VC: $6.00 per hour

FC: $8.00 per hour

Problem Analysis:

Based on the problems identified, we will be using a balanced scorecard format - seperated into the financial, customers, internal business processes and learning, innovation & growth perspectives - to further analyze in detail the problems happening at Clearwater Hospital and provide an insight on what should be done. The financial analysis aspect will then be expanded in the following section with specific calculations.

Balanced Scorecard

Problem Measures Goal/ Strategy

Financial

Fees/ Accounts Receivable

-Why are their customers only paying 80% of the lab fees?

-Are they charging too much? -Increase revenue

-Enforce customer payments Find out the standard fees being charged by the competitors and adjust accordingly. Clearwater Hospital should bring the fees as low as possible to stay competitive while still making a desirable profit

HR/ Credit policy

-Why is no one collecting the other 20%?

-Unclear Credit and Collections Policy? -Strict collections policy

-Improve internal control procedures Set a clear policy and ask customers to pay their outstanding balances; possibly offer a future discount if it is found that they are charging too much

Inventory

-Why are they purchasing more plates than needed?

-Are they of good quality? -Glass plates Figure out an estimated usage of plates each month and purchase accordingly. The standard is 3 plates per test. Around 10,800 plates should be purchased per month if 3,600 tests are performed. The amounts used needs to be recorded. Any excess shall be used in the following month and less will be purchased in that month to continue saving costs. Make sure that the glass plates being purchased are of good quality. Any plates wasted shall be recorded with stated reasons

Costs

-Why are they eligible for a purchase discount?

-Why are variable overhead costs so high?

-Why