Strategic Cost Management- ACCT90009

Workshop 10: Flexible Budgets II : Overhead costs

The MRI Department at Community Hospital

The MRI department at Community Hospital, a large urban health centre, performs magnetic
resonance imaging for heart disease, brain disorders, and total body scans for the various patient
care units (neurology, cardiovascular, OB/GYN, oncology, and so forth). The fixed costs of the MRI
department (MRI lease, space costs, personnel, overhead, and utilities) are budgeted to be $700,000
next year. The variable costs of the MRI department (supplies, fees, maintenance) are budgeted to
be $300 per MRI hour. (An MRI hour is the total time needed to position the patient, set up the MRI
for the scan, perform the scan, remove the patient, and prepare the MRI for the next patient.) The
MRI is scheduled in 15-minute blocks. Some simple scans can be performed in 15 minutes, including
the time to position the patient, set up the MRI, perform the scan, and prepare the machine for the
next patient. Most scans take 30 minutes or 60 minutes. Each patient unit (neurology,
cardiovascular, etc.) sending patients for an MRI is charged the expected, not the actual, time of the
scan. If a patient requires a 30-minute scan but actually takes 35 minutes, the patient care unit is
charged 30 minutes at the predetermined cost per minute. The predetermined cost per minute is
calculated at the beginning of the year based on (1) the expected fixed costs, (2) the expected
variable cost per minute, and (3) the expected number of minutes from the projected number of
scans of various types.

The following table projects the number of various types of scans the MRI Department expects to
perform next year.

Scan type (minutes) Projected Number of

Procedures

15 500
30 1 200
45 300
60 2 200
90 150
4 350

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At the end of the year, the MRI Department performed the following number of scans and the actual
time spent on each scan:

Scan type (minutes) Actual Number of Actual machine-time

Procedures (minutes)

15 400 6 200
30 1 300 40 000
45 280 13 000
60 2 300 139 000
90 120 11 000
4 400 209 200

The total cost of operating the MRI Department (fixed and variable costs) was $1,750,000.

Tasks
a) Calculate the predetermined cost per minute of MRI scan time.
b) Based on the predetermined cost per minute calculated, what are the total MRI charges to
the patient care units?
c) Prepare a report that analyses the financial performance of the MRI Department.
d) Write a short report that succinctly summarizes the key findings of your performance
analysis in part (c).

END last reviewed: 18 January 2022 (MYT)

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