Health Services Resource Management

Assignment 2

Due: 23^rd October 2017
45 Marks

Important: You must show all calculations and explain how you got all your answers. For example, suppose a question asks what the profit will be in a particular month and you put “$50,000”. Even if this is correct you will receive no marks if you do not show how you got the answer.
There is no need for footnotes or references unless you quote directly from a source. But it is essential that the work is your own.
Please do NOT include the question as part of your assignment. It is not necessary and all it does is increase your turnitin similarity index. Just put your answers in your assignment response.

Question 1 (12 marks)

Assume the following measures of output in three revenue-producing hospital departments:

Department             Measure of output
Radiology                  X-ray films processed
Laboratory                 Tests analysed
Patient Services*     Patient days of care – the number of patients multiplied by the number of days of each patients’ stay

* There would be many of these departments, such as obstetrics, paediatrics, and orthopaedics. Moreover, there may be both in-patient and out-patient care.

Budgeted output for 2017 is 60,000 X-ray films processed in Radiology, 50,000 tests analysed in the Laboratory, and 30,000 patients-days in Patient Services.

In addition to the revenue-producing departments, the hospital has three main service departments: Administrative and Financial Services, Plant Operations and Maintenance, and Laundry. (Of course, real hospitals have more than three revenue-producing departments and more than three service departments. This problem is simplified to keep the data manageable.)

The hospital has decided that the cost driver for Administrative and Financial Services is the direct department costs of the other departments. The cost driver for Plant Operations and Maintenance is square metres occupied, and for Laundry it is kilograms of laundry. The pertinent budget data for 2017 are as follows:

	Direct Department costs	Square metres occupied	Kilograms of laundry
Admin and financial services	$1,000,000	1,000	0
Plant operations and maintenance	$800,000	2,000	0
Laundry	$200,000	5,000	0
Radiology	$1,000,000	12,000	80,000
Laboratory	$400,000	3,000	20,000
Patient Services	$1,600,000	80,000	300,000
Total	$5,000,000	103,000	400,000

Allocate service department costs using the direct method (which is the one used in the lecture notes). (2 marks)
Compute the cost per unit of output in each of the revenue-producing departments. (2 marks)
Based on these calculations, can you tell whether these outputs are being produced efficiently? Explain why or why not. (4 marks)
Do you think that the cost drivers used are appropriate for allocating overheads from the three service departments? Can you suggest other cost drivers that would be fairer? Explain your answer. (4 marks)

Question 2 (12 marks)

You have been asked to do a cash budget for January, February and March for a medical clinic which provides free medical consultations to low income families.

The clinic had $15,000 in its bank account at the end of December. It receives a grant from the local council of $10,000 every month. However, there is a new contract and the council will now pay with a one-month delay – so the payment for January will not be received until February – and so on during the year. The clinic receives private donations of $3,000 every month. It receives another $5,000 a month from other government departments.

The clinic pays $1,000 each month for rent and the monthly salaries for January, February and March are expected to be $11,000 every month. Medical supplies are increasing in price due to inflation. In December, $4,500 of supplies were used and it is expected that this cost will rise by $100 every month. The clinic pays its suppliers with a one-month lag – so the $4,500 for December will be paid in January, and so on for the rest of the year. Other expenses that are paid in cash every month total $3,000.
The Clinic wants to be sure that there is $4,000 to begin every month after January. If they have less than that amount at the end of a month they borrow money. If they have more than $4,000 they invest it.

Construct a cash budget for the first three months of the year – i.e. January, February and March. Also, include a total for the 3-month period from January to March. (3 marks)
Write a report to the clinic manager outlining how much the Clinic will need to borrow or have to invest at the end of each month over this 3-month period. If the clinic did not borrow money over this period, what would its bank balance be at the end of March? (3 marks)
Your manager also wants you to write a report identifying any problems with the clinic’s cash flow. Do you think that the clinic’s operations are sustainable in the long term? Explain why or why not. What actions would you recommend? (6 marks)

Question 3 (6 marks)
Dr Eger is a physician who operates on two different types of patients – Type X and Type Y. He has been pressing the Excellence Hospital for more operating room time. The Hospital is very busy and would need to cut back on the operating hours of other doctors if it increases Dr Eger’s operating room time.
Dr Eger says that he is so efficient lately that the Hospital would be financially unwise to refuse his request. To prove his efficiency, Dr Eger points out that in August he treated 18 patients at a total cost of $129,100. In September, he treated 18 patients for a total cost of $127,000 – thereby generating total savings of $2,100.
Your investigations reveal that in August he treated 7 Type X patients with an average cost of $4,300 and 11 Type Y patients with an average cost of $9,000. In September, he treated 8 Type X patients and 10 Type Y patients. Costs for his patients in September were $5,000 for Type X patients and $8,700 for Type Y patients. Dr Eger points out that although the cost for Type X patients had risen, the costs for the higher volume, higher cost, Type Y patients, had fallen.

Develop a case mix variance and a cost variance so you can better understand the impact on the hospital of the changes in Dr Eger’s practice from August to September. (3 marks)
Would you agree with Dr Eger that he has become more efficient? Explain why or why not. What other information would be of interest in this case to help you decide about whether to increase Dr Eger’s operating hours? (3 marks)

Question 4 (5 marks)
The Southern Hospital has decided to replace some existing medical equipment and is considering between two different possible replacement machines – Model A and Model B. Model A is more expensive to acquire but costs less to run than Model B.
Information on the costs of these two pieces of equipment are:

	Model A	Model B
Purchase price	$105,000	$60,000
Annual outlay – year 1	10,000	20,000
Annual outlay – year 2	10,000	20,000
Annual outlay – year 3	10,000	20,000
Annual outlay – year 4	10,000	20,000
Annual outlay – year 5	10,000	20,000
Total cost	155,000	160,000

The Hospital managers are going to recommend Model A as they think it is the best value for money – their aim is to choose the least costly machine. The discount rate to be used is 10%. Have they made the right choice? Explain your answer. If the discount rate was 5% would this make a difference to your answer? Explain why or why not. (3 marks)
Is choosing the cheapest machine always the correct decision? What other factors do you think should be considered in this decision? (2 marks)
Question 5 (10 marks)
Royal Valley Hospital is a major hospital that serves 11 small rural communities within a 40-kilometre radius. The hospital offers all the medical and surgical services of a typical small hospital. It has a staff of 18 full-time doctors and 20 part-time visiting specialists.
Royal Valley has a payroll of 150 employees consisting of technicians, nurses, therapists, managers, directors, administrators, dieticians, secretaries, data processors and cleaners.

Required:

For each of the activities listed below, identify a cost driver that would serve as a valid measure of the resources consumed by the activity. Explain why you think this would be an appropriate way to allocate the costs of these services to departments within the hospital.

Activity	Cost Driver
Infection control
Medical Supplies/Consumables
Patient transport
Human Resources
Security
Medical Records
Financial Administration
Occupational Health and Safety