1. PRODUCT COST BY INDUSTRY

2. Overview of Costing for Manufacturing Companies Manufacturing Overhead Machine Hours Direct Labor Direct Materials Indirect Cost Pool Cost Allocation Base Cost Object Direct Costs Product Cost

3. Five Step Approach to Job Costing 1Identify the cost object. 2Identify the direct costs for the job. 3Identify the indirect cost pools associated with the job. 4Select the cost allocation base for each indirect cost pool. 5Calculate the rate per unit of the allocation base to allocate indirect costs.

4. Calculation of Overhead Rates Total Quantity of the Cost Allocation Base Total Costs in the Cost Pool Overhead Rate =

5. Activity-Based Costing The key assumption in Activity-Based Costing is that overhead costs are caused by a variety of activities, and that different products utilize these activities in a non-homogeneous fashion. ABC attempts to select as the allocation base the best cost driver for each overhead cost item; i.e., the cost driver that best captures the cause and effect relation- ship between products and overhead costs.

6. Overview of Costing for Manufacturing Companies Manufacturing Overhead Machine Hours Direct Labor Direct Materials Indirect Cost Pool Cost Allocation Base Cost Object Direct Costs Product Cost

7. Overview of Costing Under ABC INDIRECT COSTS DIRECT COSTS D.M. D.L. WARRANTY # OF PARTS MACH. HRS D.L. HR.S PURCH- ASING PERSONNELMACHINE SHOP INDIRECT COST POOLS COST ALLO- CATION BASES COST OBJECT COST TRACING DIRECT COSTS

8. Cost Allocation Bases used for Manufacturing Overhead U.S. Manufacturers

9. Cost Allocation Bases used for Manufacturing Overhead Japanese Manufacturers

10. Cost Allocation Bases used for Manufacturing Overhead U.K. Manufacturers

11. Dialysis Clinic, Inc. Two types of Dialysis: Hemodialysis (HD)Peritoneal dialysis (PD) Equipment intensive, in-clinic treatment 3 treatments per week 102 patients $1.9 million in revenues self-administered, in- home treatment Daily treatment 62 patients $1.1 million in revenues

12. Dialysis Clinic, Inc. Cost Category Total Cost Alloc- ation Base Units of Allocation Base HDPDTotal Summary of Costs and Identification of Cost Drivers: Standard Supplies $664,900 Not applicable: these are direct costs Episodic Supplies $310,695

13. Dialysis Clinic, Inc. Cost Pool Total Cost Allocation Base Units of Allocation Base HDPDTotal Summary of Costs and Identification of Cost Drivers: Nursing RNs LPNs Admin. Tech.s Total $239,120 404,064 115,168 124,928 $883,280 RN FTEs LPN FTEs treatments dialyzer treatments 5 15 14,343 2 4 20,624 0 7 19 34,967 14,343

14. Dialysis Clinic, Inc. Cost Pool Total Cost Alloca- tion Base Units of Allocation Base HDPDTotal Summary of Costs and Identification of Cost Drivers: General facility Admin Records Utilities Total $233,226 354,682 157,219 40,698 $785,825 Sq ft patients treatmts Kilowatts 18,900 102 14,343 563,295 11,100 62 20,624 99,405 30,000 164 34,967 662,700

15. Dialysis Clinic, Inc. Cost Pool Total Cost Alloc- ation Base Units of Allocation Base HDPDTotal Summary of Costs and Identification of Cost Drivers: Dur- able equip- ment 137,046Nursing Svc Cost $661,966$221,314$883,280

16. Dialysis Clinic, Inc. Calculation of Overhead Rates: Cost PoolTotal costTotal Units of Allocation Base Overhead Rate Nursing RNs LPNs Admin Technicians Total $239,120 404,064 115,168 124,928 $883,280 7 19 34,967 14,343 $34,160 per RN FTE $21,267 per LPN FTE $3.29 per treatment $8.71 per dialyzer treatment

17. Dialysis Clinic, Inc. Calculation of Overhead Rates: Cost PoolTotal costTotal Units of Allocation Base Overhead Rate General Facility Admin Records Utilities Total $233,226 354,682 157,219 40,698 $785,825 30,000 164 34,967 662,700 $7.774 per sq ft $2,163 per patient $4.496 per treatmt $0.0614 per kilowatt

18. Dialysis Clinic, Inc. Calculation of Overhead Rates: Cost PoolTotal costTotal Units of Allocation Base Overhead Rate Durable equipment $137,046$883,280$0.15516 per nursing service dollar

19. Dialysis Clinic, Inc. Allocation of Costs using A.B.C.: Cost Category O/H Rate HD Units HD Cost PD Units PD Cost Standard supplies Episodic Supplies Direct cost $512,619 98,680 $152,281 $212,015

20. Dialysis Clinic, Inc. Allocation of Costs using A.B.C.: Cost Pool O/H Rate HD Units HD Cost PD Units PD Cost Nursing RNs LPNs Admin Tech.s Total 34,160 21,267 3.29 8.71 5 FTEs 15 FTEs 14,343* * treatments $170,800 318,998 47,240 124,928 $661,966 2 4 20,624 0 $68,320 85,066 67,928 0 221,314

21. Dialysis Clinic, Inc. Allocation of Costs using A.B.C.: Cost Pool O/H Rate HD Units HD Cost PD Units PD Cost general facility admin records utilities Total 7.774 2,164 4.496.0614 18,900 sq ft 102 patient 14,343 563,295 $146,933 220,595 64,489 34,593 $466,610 11,100 62 20,624 99,405 $86,293 134,087 92,730 6,105 319,215

22. Dialysis Clinic, Inc. Allocation of Costs using A.B.C.: Cost Pool O/H Rate HD Units HD Cost PD Units PD Cost durable equip- ment $.15516 per nursing dollar 661,966$102,785221,314$34,261

23. Dialysis Clinic, Inc. Summary of Costs: Cost CategoryHDPD Standard Supplies Episodic Supplies Nursing Services General Overhead Durable equipment Total $512,619 98,680 661,966 466,610 102,785 $1,842,660 $152,281 212,015 221,314 319,215 34,261 $939,086

24. Dialysis Clinic, Inc. Summary of profitability: HDPD “Traditional” Costing Revenue Direct Costs Indirect Costs Net Income Activity-Based Costing Revenue Direct Costs Indirect Costs Net Income $1,860,287 611,299 1,389,347 ($140,359) $1,860,287 611,299 1,231,361 $17,627 $1,146,488 364,296 416,804 365,388 $1,146,488 364,296 574,790 $207,402

25. Dialysis Clinic, Inc. Summary of profitability: HDPD R.C.C. Costing Revenue Direct Costs Indirect Costs Net Income $1,860,287 611,299 1,117,463 $131,525 $1,146,488 364,296 688,688 93,504