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Overhead Allocation in Determination of Seat Rent of Private Hospitals
http://www.reportbd.com/articles/235/1/Overhead-Allocation-in-Determination-of-Seat-Rent-of-Private-Hospitals/Page1.html
shofiq uddin khan
I complete my BBA from PSTU. 
By shofiq uddin khan
Published on 5 March 2010
 
To know Cost allocation methods followed in private hospitals for their seat rent. A case study of Fortune Hospital Ltd., Patuakhali.

Report On Treatment Of Overhead Allocation In Determination Of Seat Rent

Chapter: 1
 
INTRODUCTION
 
SCOPE AND OBJECTIVE OF THE REPORT
 
As a business expectative of future, we should have to gather experience beside our institutional education. We should not concern our lesson only in classroom but to implement it in practical life that will help us in our future life.
 
So, identify objectives is very much important. Our purpose of preparing the report is:
 
To identify and know the cost allocation methods followed in private hospitals.
To identify how the private hospitals make their cost allocations for their seat rent.
To know how the private hospitals use the cost allocation for their seat rent.
To find out how effectively they do this job.
 
METHODOLOGY OF THE STUDY
 
Collection of data is an important part of a term paper preparation. In preparing the report we have maintained some steps. Which are given bellow —
 
Step-1: At first, we select Fortune Hospital ltd. for making our report on “Treatment of seat rents” practices of a particular organization.
 
Step-2: We went to the Fortune Hospital ltd. with group and meet with the director, doctors’, manager and other employees.
 
Step-3: Then we collect various (primary and secondary) data from the manager about the “Treatment of seat rents”
 
Step-4: Process the data through taking helpful hinds from our course teacher M. Takibur Rahman.
 
Step-5: Again analysis and interpretation the data.
 
Step-6: Then we calculate the relevant calculations.
 
Step-7: Finally, we prepared our report.
 

LIMITATION OF THE STUDY
  
It was not so easy to us prepare such type of report as the following reasons was existed.
 
This report is based on treatment of overhead allocation in determination of seat rent. We don’t have sufficient knowledge about cost allocation.
 
This is a calculative and analysis based report. So it needs sufficient time. But we do not have surplus time to make such kind of analytical and calculative report.
 
As the Fortune Hospital ltd. is a private organization, the authority try to keep some information confidential. As a result we were not capable to collect the total expected information from them.
 
Although we face some limitation, we were trying our best to overcome these complexities and provide information as far as possible.
 

CHAPTER: 2 DISCUSSION
 
2.1 DEFINITION OF OVERHEAD
 
Any expenditure which cannot be charge directly to any job, operation or process may be called overhead. Thus, overhead indicates indirect expenditure of any kind. It includes indirect materials, indirect wages and indirect expenses.
 
Eric l. Kohler defined overhead as “any cost of doing business other than a direct cost of an output of product or services. He also pointed out that overhead is “a generic name for manufacturing cost of materials and services not readily identifiable with the product or services that constitute the main output of an operation. Overhead therefore, means those expenses, which cannot be allocated to any product or services (as direct cost) but can be apportioned to or absorbed by, the product or services.
 
According to H. J. Wheldon, overhead represents the cost of indirect materials, indirect labor and such other expenses including services as cannot be conveniently be charged to a specific unit. W. W. Bigg says that all indirect costs are termed as overheads. According to W. M. Harper, overheads are costs which do not result solely from the existence of individual cost unit. 
 
 
2.2 DIFFERENT NAMES OF OVERHEAD
 
Overhead has many other names such as overhead cost, overhead expense, overhead charge, manufacturing and commercial expense, indirect cost, non productive cost, supplementary expense, supplementary cost, burden, on cost, load, loading etc.
 
Sometimes distinctions are drown between these terms but such distinctions are not consistently observed. In fact, all these terms are used to mean the same thing that is overhead. 
 
2.3 CLASSIFICATION OF OVERHEAD
 
Overhead may be classified in various ways as stated below-
 
A)  Function wise classification
B)   Element wise classification
C)   Behavior wise classification
D)  Control wise classification
 
Let us discuses each of the above briefly-
 
A. Function wise classification

Every manufacturing organization has three distinct functions, they are
 
i)   Production function
ii)   Administrative function
iii)   Selling and distribution function.

Stores expenses, time office expenses, pay-roll department expenses, transport cost, super vision cost, factory clerical cost, in direct labor, personnel department expenses, factory supplies,  maintenance and repair, insurance, depreciation, canteen expenses, rent and taxes etc are the examples of production overhead. 
 
Rent, rates and taxes of administrative building, salary of the staff office connected with general administration, depreciation of office equipment and of building, postage, telegram and telephone, stationary, office expenses, director’s remuneration, bank charges etc. are the examples of administration overhead.
 
Sales men’s salary and commission, advertisement expenses, travelers commission, market research expenses are the examples of selling overhead.
 
Godown expenses in connection with storing of finish product, awaiting sale, packaging charges, loading and unloading, insurance, maintenance, and repair of delivery vans are the examples of distribution overhead.

B)  Element wise classification
 
If indirect expense are classified element wise we come across three classes
1.     Indirect materials
2.     Indirect labor
3.     Indirect expenses
 
1. Indirect materials:
 
Administration: Stationary, canteen food, cleaning materials etc.
 
Selling and distribution: Stationary, fuel etc.
 
2. Indirect labor:
 
Factory: salary of foreman, supervisors, works managers etc. wages of maintenance and repairs staff, wages of indirect workers etc.
Administration: salary of all employees of administrative function from managing director to sweeper, directors remuneration etc.
 
Selling and distribution: salary of sales officers, staff and distribution men.
 
3. Indirect expenses:
 
Factory: Repairs and maintenance, rent, rates and taxes, insurance, depreciation etc.
 
Administration: all expenses in connection with general administration.
 
Selling and distribution: Godown rent, insurance, advertisements, depreciation etc.

C) Behavior wise classification
 
Fixed overhead: Rent, rates, insurance, stationary, salary of management staff etc. 
 
Variable overhead: Indirect labor, indirect material, power, packaging, travelers, salesmen’s commission etc.
                                                         
Semi-variable or semi-fixed overhead: repairs and maintenance, depreciation, supervisors salary etc. 
 
D) Control wise classification
 
Overhead costs which can be controlled by the exercise of proper managerial influence are controllable costs and overhead costs that cannot be controlled in spite of the best exercise of managerial influence are uncontrolled labor costs.
 
2.4 METHODS OF OVERHEAD ALLOCATION
 
Service departments, by definition, don't produce marketable goods.  Their costs, therefore, have to be allocated to those departments that use the services.  From there the costs are allocated further, either to other departments or to products. There are mainly three methods for overhead allocation for service department. They are-
 
1. The direct method.
 
2. The step-down method.
 
3. The reciprocal method.
 
 
1. The direct method, which is the most widely used allocation method, allocates each service department's costs directly to the production departments, ignoring services rendered to other service departments. 
 
2. The step-down method, also widely used, allocates costs of service departments to both production and service departments.  The sequence of allocation usually begins either with the department rendering service to the greatest number of other service departments (or, alternatively, the most costly service department) and progresses all the way to the one rendering service to the smallest number of other departments (or to the least costly department).  Once a service department's costs have been allocated, no subsequent service-department costs are allocated back to it.  
 
3. The reciprocal method is the most accurate allocation method.  This method recognizes reciprocal services among service departments.  It requires solving 
a set of simultaneous linear equations. 
 
OVERVIEW OF SELECTED ORGANIZATION (FORTUNE HOSPITAL)
 
“Providing medical facilities with great care” with this objective in 2005 fortune hospital has been established in Patuakhali. As it is a private hospital, it has a objective of earning profit but their objective is “Earning profit by serving and providing maximum effort.”
 
The owner of the hospital is Dr. Fazle Rabbi, MBBS (DMC); Specialist in Neuromedicine, RMO, department of Neuromedicine, BSMMU (PG hospital),
with the co-owner ship of Dr. Shirin Akter, MBBS.
 
This hospital is a newly established hospital in Patuakhali. They are now working by taking rent a 4 stored building with a rent of Tk 24000 per month. They have four appointed doctors. Two of them are dentist and other two are of medicine. They give about Tk 12000 as remuneration (basic salary). They provide some other facilities to each doctor. For any kind of additional service, they call guest doctors from Patuakhali, Barisal as well as from Dhaka. Dr. Fazle Rabbi also visits the hospital in more than 4 times in a month.
 
They have 12 sisters and 5 words boy to serve 24 hours in the hospital by rotation. They have one manager, one accountant and two receptionists. They also have a pathologist and an electrician.
 
Fortune hospital is a 20-bed hospital. Within these 20 beds 15 is for general and 5 for the VIP patient. The seat rent is also different in these two categories. For general bed they charge Tk 150 per day and Tk 700 per day for the VIP beds.
 
They also provide outdoor facility for the patients. For this, each patient has to pay Tk 200 for service charge. Four days in a month, they provide service by the help of specialist doctors from Dhaka. 
 
Though Fortune hospital is a newly established hospital it is working well and they are now in a position of good competitor for other private clinics of Patuakhali.
 
With the help of generator, they provide 24 hours electricity.

CHAPTER: 3 CALCULATION AND ANALYSIS
 
3.1 CALCULATION OF WEIGHT OF REVENUES

 Particulars

Amount

Weight

Percentage

Outdoor revenues

864000

0.37

37%

Revenues from general beds

472500

0.20

20%

Revenues from VIP beds

525000

0.22

22%

Operation theater revenues

500000

0.21

21%

Total revenues

2361500

1.00

100%


Calculation & Analysis of Overhead Allocation of Seat Rent of Private Hospitals

3.3 Allocation of direct expenses on the basis of weighted revenue

Other Expense

Amount (Tk)

Outdoor

Seat rent

Operation theater charge

General

VIP

Doctor’s salary

606000

224220

121200

133320

127260

Employees salary

37400

13838

7480

8228

7854

Manager’s salary

60000

22200

12000

13200

12600

Emergency medicine

110000

46700

22000

24200

23100

Total

813400

306958

162680

178948

170814

3.4 Allocation of total cost to the seat rent

 Particulars

General bed

VIP bed

Overhead expenses

113564

124920

Direct expense

162680

178948

Total

276244

303868

3.5 Calculation of cost per seat per day

 

For general bed,

 

Cost per seat per day= [100% - 30%= 70%] = 87.70

 

 

3.6.a Calculation of profit per seat in general bed:

 

                                      Seat rent = 150

                          Less:    Cost per seat = 87.70

                                      Profit per seat = 62.3

 

So profit from general bed = 62.3

 Percentage of profit from general bed = 41.53%

 

 

For VIP bed,

                

           Cost per seat per day= [100% - 50% = 50%]

                                             = 405

 

3.6.b Calculation of profit per seat for VIP bed:

 

                                      Seat rent = 700

                             Less: Cost per seat = 405

Profit per seat = 295

 

So profit from VIP bed = 295

Percentage of profit from VIP bed = 42.14%

 

 

3.7 Total cost allocation in per seat in a view

Particulars

Overhead expenses

Direct expenses

Total expenses

Per seat per day expense

Seat rent

Profit

%

General bed

113564

162680

276244

87.7

 

150

62.3

 

41.53%

 

VIP

bed

124920

178948

303868

405

 

700

295

 

42.14%

 

 

Calculation of Profit margin

Category

Total Expense

Revenue

Profit

Percentage

Out door

 

538191

864000

325809

37.71%

Operation Theater charge

337050

500000

162950

32.59%

Workings:

  

Calculation of total expense for out door =

 

                   Overhead expense + Direct expense

                  = 231233 + 306958

                  =538191

 

 Calculation of profit margin = 37.71%

   

Calculation of total expense for operation theater charge =

 

                                    Overhead expense + Direct expense

                                = 166242 + 170814

                                = 337056

 

Calculation of profit margin = 32.59%


Findings, Conclusion & Recommendation of Fortunr Hospital Ltd, Patuakhali

CHAPTER: 4 FINDINGS
 
FINDINGS

Fortunr hospital has only three sources of revenue they are, out door income, seat rent and operation theater charge.
 
They have the total income of Tk 2361500 and from the seat rent; they earn Tk 997500, revenues per year.
 
This seat rent is collected from two types of seat- general bed and VIP bed.
 
Their rent per seat is Tk150 for general and Tk. 700 for VIP seats per day.
 
Their cost per seat per day is Tk. 87.70 for general bed and Tk. 405 for VIP bed.
 
Fortune hospital ltd. are in a profit position for general bed for Tk. 62.3 (per day allocation) and profit Tk. 295 from VIP bed (per day allocation).
 
Their profit from general bed is 41.53% and profit from VIP bed is 42.14%.
 
Their profit margin for outdoor revenue is 37.71% and from Operation Theater, charge is 32.59%.
 
 
CHAPTER: 5 CONCLUSION AND RECOMMENDATIONS
 
5.1 CONCLUSION
 
Cost allocation is one of the most difficult tasks in running any business. Accurately understanding the costs, however, are imperative if anyone want his business to succeed. One has to price the products or services in a way to be profitable and allocating costs is a major part of profitability.
 
Overhead allocation is one of the more confusing and complex issues facing many businesses. Yet, figuring out how to best determine overhead is very important to a firm’s profitability. Here, for the calculation of overhead and direct expenses we used the physical output measure. From the overall calculation, we get the cost per bed and the profit per day per bed. This calculation gives us the result that the private hospital is making about 41.53% profit from their general seat and 42.14% profit from VIP bed. They have only other two types of revenue source as outdoor revenue and operation theater charge. The profit margin of outdoor revenue and operation theater charge is 37.71% and 32.59%.
 
We try to make this report as correct as possible with the help of the information has been supplied by the Fortune Hospital authority. 
 
 
5.2 RECOMMENDATION
 
They have only three sources of revenue. They are --from the seat rent, from the outdoor and from the operation theater charge. They must try to increase their sources of revenue.
 
Today’s market is competitive market. In private hospital or clinic sector there are number of competitors. So to exist in this competitive market Fortune hospital should try to increase their health services.
 
Their hospital in a rental building for which they have to give Tk. 24000 per month. That is why, though it is a newly establish hospital should try to make their own hospital building.
 
It is only 20 beds hospital. To meet the increasing demand in medical sector they should try to increase their bed capacity with modern medical instruments.
 
This hospital is in Patuakhali district. And they are in a profit position in terms of general bed for about 41.53% and profit from VIP bed is about 42.14%. For this reason, their seat rent basically in general bed and in VIP bed is in somehow properly allocated. But in this competitive market to derive more client they can minimize their seat rent.
 
Their cost for each general bed is Tk. 87.70 and Tk. 405 for VIP bed. But the seat rent for general is Tk. 150 and for VIP is Tk. 700. So they can take client driven policy if the management is aggressive.
 
To days, market is very much competitive. So in taking any type of decisions they should be very much careful.
 
There is no ambulance service by the Fortune hospital. They should try to provide this facility as early as possible.
 
5.3 BIBLIOGRAPHY
 
1. Matz Adolph & Usry Milton F.; Cost Accounting Planning and Control ; 8th
    edition, South western publishing company.
 
2. Basu Sankar Prasad & Das Monilal; Theory and practice of costing
    (Volume one); 13th edition, Rabindra library.
 
3. Horngren Charlest T., Datar Srikant M. & Foster George; Cost Accounting;
    12th edition, Prentice hall of India private limited.
 
5.4 Appendices
 
 
Fortune hospital ltd.
Sher-E-Bangla Road, Patuakhli
Income statement for the 2007

Expenses

Tk

Income

Tk

Doctor’s salary

606000

 

Out door income

864000

Employees salary

374000

 

Seat rent

 

Manager’s salary

60000

 

General:   472500

 

Washing charge

40000

 

VIP :        525000

 

Generator charge

45420

 

Total

(They consider 30% for general bed & 50% for VIP bed as a vacancy allowance)

997500

Telephone bill

12500

 

 

 

News paper bill

8640

 

OT charge

500000

Transportation expense

45000

 

 

Laboratory expense

 

47000

 

 

Emergency medicine

 

110000

 

 

VAT charge

32000

 

 

 

Electricity bill

72000

 

 

 

House rent

240000

 

 

 

Depreciation expense

83400

 

 

Other expense

10000 

 

 

Total expense

1785960

 

Net income

575540

 

 

 

2361500

 

2361500