Professional Documents
Culture Documents
8
Treatment of Overhead Allocation in Determination of Seat Rent of ‘Abdul
Wadud Memorial Hospital’, Khulna
SUBMITTED TO
M. Takibur Rahman
Lecturer
Department of Accounting & Information System
Faculty of Business Administration and Management
SUBMITTED BY
Group: 01(Warrior)
Level-3, Semester-1
Faculty of Business Administration and Management
Cost Accounting
Course Code: AIS 314
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PATUAKHALI SCIENCE AND TECHNOLOGY UNIVERSITY
Letter of Transmittal
To
M. Takibur Rahman
Lecturer
Department of Accounting and Information System
Faculty of Business Administration and Management
Dear Sir,
Please call me for any further information at your convenient time and place.
Yours truly,
Group: 01(Warrior)
Level-3, Semester-I
Faculty of Business Administration and Management
Patuakhali Science and Technology University
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Letter of Authorization
To
M. Takibur Rahman
Lecturer
Department of Accounting & Information System
Faculty of Business Administration and Management
Dear Sir,
We also express my honest confirmation in support of the fact that the said “Report”
has neither been used before to fulfill any other course related purpose nor it will be
submitted to any other person or authority in future.
Yours truly,
Group: 01(Warrior)
Level-3, Semester-I
Faculty of Business Administration and Management
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Patuakhali Science and Technology University
Acknowledgement
We like to give thanks especially to our friends and many individuals, for their
enthusiastic encouragements and helps during the preparation of this report us by
sharing ideas regarding this subject and for their assistance in typing and proof
reading this manuscript.
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Table of Contents
Chapter–1
Page
► Executive summary ……………………………………………..……………………...……. 01
►Origin of the report ………………………………………………………………………........ 02
► Purpose of the report ………………………………………………………………………… 02
► Limitation of the Study …………………………………………………..…………………... 03
► Methodology of the Study ………………………………………………..……………...…... 04
Chapter – 2
►Introduction …………………………………………………………………………………… 05
► Overview of Abdul Wadud Memorial Hospital ……………………………………………… 06
► Definition Overhead ………………………………………………………………………….. 07
► Classification of Overhead …………………………………………………………………… 07
► Cost Categories Normally Included in a Firm’s Overhead Schedule ………………………... 11
► Income Statement …………………………………………………………………………….. 12
► Basis of Cost Allocation ……………………………………………………………………… 13
► Calculation of profit Margin for Seat ………………………………………………………… 15
► Calculation of Profit Margin for Other Sources ……………………………………………… 17
Chapter – 3
►Summary ……………………………………………………………………………………… 18
Chapter – 4
► Recommendations …………………………………………………………………………..... 19
► Conclusion ……………………………………………………………………………………. 20
► References ……………………………………………………………………………………. 21
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Executive Summary
In 1998, at the bank of Ruphsa River Abdul Wadud Memorial Hospital was opened
with 200 beds to help the people who are deprived of medical care. Now it is
continuing its service with its 200 general beds and 50 well equipped cabins with
the reputation of the biggest private hospital in Khulna Division. They generally
prepare income statement and balance sheet to justify their profit. According to our
study over overhead allocation, here we try to treatment the overhead allocation in
determination of seat rent of Abdul Wadud Memorial Hospital.
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Origin of the report
We are lucky to say that our honorable course teacher M. Takibur Rahman
Lecturer, Department of Accounting & Information System, of Faculty of
Business Administration and Management. Assigned us a report on
“Treatment of Overhead Allocation in Determination of Seat Rent of ‘Abdul
Wadud Memorial Hospital’ Khulna” This report is prepared on the basis of
surveying the Abdul Wadud Memorial Hospital.
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Limitations and Scope of the Report
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Methodology of the Study
This report is based on both primary and secondary data. Initially, the work is
started with data those were available at hospitals’ news letter. Moreover, it
becomes helpful to gather some more information from the website of the hospital.
Later on, we have collected the data of balance sheet and income statement from a
faithful executive person of accounting department of Abdul Wadud Memorial
Hospital. According his providing data we the Group - 01 made our report on
treatment of overhead allocation in determination of seat rent of Abdul Wadud
Memorial Hospital. So, all the liability of accuracy of this assessment is gone over
his providing data.
Then we analyze those data from many angles, in different aspect and present the
information in different segment according to their category, in compact way. We
use weight of revenue for allocating the cost. We highlight different important
things, which we found during our survey. After doing all of those we submit the
report to the proper authority.
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Introduction
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Overview of Abdul Wadud Memorial Hospital
The general health status in Bangladesh is very weak and horrifying which is
natured by malnutrition, poor hygiene, and the lack of medical facilities. The people
in southwestern part of Bangladesh are neglected and less fortunate in many aspects
of their lives. The statistics are disheartening: only one hospital bed for every 3000
people, and one doctor for 5000 people. As a result, a lot of people die in every year
for lack of proper medical facilities. In 1998, at the bank of Ruphsa River Abdul
Wadud Memorial Hospital was opened with 200 beds to help the people who are
deprived of medical care. The hospital provides a full range of medical service
through its General, Eye, Mother & Child, Acid Burnt and Dental Units. Now it is
continuing its service with its 200 general beds and 50 well equipped cabins with
the reputation of the biggest private hospital in Khulna Division. The hospital staff
is comprised of qualified and skilled doctors, nurse, and supporting staff. The
hospital also operates satellite medical camps throughout the rural communities.
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Definition Overhead
Any expenditure which cannot be charged directly to any job, operation or process
may be called overhead. Thus, overhead indicates indirect expenditure of any kind.
It includes indirect material, indirect wages and indirect expenses.
Overhead has many other names such as overhead cost, overhead expense, indirect
cost, overhead charge, manufacturing and commercial expenses, non-productive
cost, supplementary expenses, supplementary etc.
Overhead expenses are all costs on the income statement except for direct labor and
direct materials. Overhead expenses include accounting, advertising, depreciation,
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indirect labor, insurance, interest, legal fees, rent, repairs, supplies, taxes, telephone,
travel and utilities.
According to Eric L. Kohler— overhead cost is any cost of doing business other
than a direct cost of an output of production or services.
Here, indirect materials reefer to material cost which cannot not be allocated to any
job or processes, but can be apportioned to or absorbed by jobs or processes.
Indirect labor/wages refer to wages other than direct wages, and indirect expenses
are also expenses other than direct expenses.
Classification of Overhead
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In case of functional classification, overhead expenses can divided into two general
categories—
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staffs, office connected with general administration, depreciation of office
equipment and of building, postage, telephone, stationary, office expenses,
directors’ remunerations, bank charges etc. are examples of administrative
overhead.
If indirect expenses are classified element wise with come across three classes—
a. Indirect material
b. Indirect labor
c. Indirect expenses
Element wise classification may be done within each function or for all functions
taken together. The following are some examples.
a. Indirect material
Factory: consumable stores, jutes and cotton wastes, lubricating oil, fast and
materials, fire-extinguishing material, stationary, canteen food stuff etc.
Selling and distribution: packing materials, stationary, fuel and lubricating oil for
delivery van etc.
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b. Indirect labor
Selling and distribution: salary of sales office staff and distribution men.
c. Indirect expenses
Factory: repairs and maintenances, tent, rates and taxes, insurances, depreciation,
stores expenses (other than salary of repairs staff, maintenance staff, and store
staff) etc.
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The change in the volume of the production is the main consideration for behavior
wise classification. Expenses that remain fixed irrespective of the level of output
constitute fixed overhead; expenses that changes proportionately with the changes
in the level of output constitute variable overhead and expenses that change but not
proportionately with the change in the level of output constitute semi-variable
overhead or semi-fixed overhead.
Variable overhead: indirect labor, indirect material, power, packing, travelers’ and
salesmen’s commission etc.
Overhead expenses can be classified into two categories on the basis of control—
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i. Controllable costs
Overhead costs which cannot be controlled in spite of the best exercise of proper
managerial influence are known as uncontrollable costs.
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Rent — office and storage space costs, not charged direct to
a project.
Repair and Maintenance — services and minor repairs to office space and
equipment.
Sick Leave — costs paid by the firm normally associated for leave taken for illness,
injury, etc.
Social Security Taxes
Subscriptions and Publications
Telephone — costs incurred not chargeable to direct projects.
Unemployment Taxes
Warranty Services — costs incurred for previously completed projects, or fees for
service contracts.
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Salary of doctors 2,880,000 Seat rent
Salary of consultant 1,344,000 General bed 15,000,000
Salary of directors 1,200,000 Cabin 6,750,000
Salary of officers 1,296,000 (Less) vacancy allowance (2,250,000)
Wages of nurse 1,120,000 19,500,000
Wages of cleaners 600,000 Outdoor 3,900,000
Wages of MLF 240,000 Operation theater charge 5,000,000
Transportation expenses 320,000 Laboratory 2,200,000
Bonus 600,000 Food and nutrition 2,400,000
Generator bill 220,000 Transportation 1,200,000
Electricity bill 350,000
Telephone bill 100,000
Water bill 75,000
Stationary expenses 245,000
Laboratory expenses 500,000
Food and nutrition 860,000
Cleaning cost 240,000
Depreciation expenses 3,500,000
Operation theater (OT)
expenses 500,000
VAT (2.25%) 7,600,000
Operating and maintenance of
machinery 400,000
Miscellaneous expenses 200,000
Tax 2,611,000
Total expenses 27,001,000
Net profit 7,199,000
Total 34,200,000 34,200,000
All cost is allocated in the above table based on the revenues’ weight. The weighted
revenues are multiplied by specific cost then we get different cost under different head.
Such as Salary of officers, Salary of directors, Wages of cleaners, Bonus, Generator bill,
Electricity bill, Water bill, Stationary expenses, Cleaning cost, Depreciation expenses,
VAT (2.25%), Operating & maintenance expenses, Miscellaneous expenses and Tax
expenses are allocated on the basis of the weight of seat rent (general bed and cabin)
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revenue, outdoor, operation theater (OT) charged, laboratory, transportations, food and
nutrition’s revenues. Which are as follows —
Wages of MLF expenses is allocated on the basis of the weighted revenues of seat rent
(general bed and cabin), outdoor, operation theater (OT) charged, and laboratory. Which
are as follows —
Salary of doctors, Salary of consultant are allocated on the basis of the weighted revenues
of seat rent (general bed and cabin), outdoor, operation theater (OT) charged. Which are
as follows —
*All amounts are
in taka
Categories of Revenues Amount Weights
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Seat rent
General 15,000,000 52.82%
Cabin 4,500,000 15.85%
Wages of nurse is allocated on the basis of the weighted revenues of seat rent (general bed
and cabin), operation theater (OT) charged. Which are as follows —
For calculating seat expense of bed, total expense is divided by the multiplication of
effective day a year and number of beds.
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Calculation of profit per seat
Net income
* Profit Margin = × 100
Revenues
The cost of per general seat of Abdul Wadud Memorial Hospital’s is taka 190.40 per
day and against this cost they charged taka 250.00. As a result they earn taka 59.60
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per day per bed as profit. The percentage of profit of Abdul Wadud Memorial
Hospital’s is 23.84% on the revenue of general bed. So, from the seat rent Abdul
Wadud Memorial Hospital earn taka 3,575,981 per year. This source is the major
source of their earnings, because from this source they earn 23.84% whereas gross
profit is 21.05%.
Side by side they have also comfortable cabin. They provided extra facilities to the
cabin. For this reason they spend more that is Taka 342.90 per cabin per day.
Against this cost, Abdul Wadud Memorial Hospital charged Taka 450 per cabin per
day and they earn taka 107.10 per day per cabin as net profit. The profit is 23.83%
of revenue. Here we also find that Abdul Wadud Memorial Hospital use cabin for
higher rate of profit (23.83%) whereas gross profit is 21.05% of total cost.
From above discussion, it is clear that seat rent is the major source of earning of
Abdul Wadud Memorial Hospital. Both general seat and cabin gives higher rate of
profit. They simply think that more site is filled up by patient will increase higher
rate of profit.
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Categories Expenses Revenues Net profit Profit margin*
Outdoor 2,892,173 3,900,000 1,007,827 25.84%
Operation Theater 4,309,161 5,000,000 690,839 13.82%
Food and Nutrition 2,245,537 2,400,000 154,463 6.44%
Transportation 991,439 1,200,000 208,561 17.38%
Laboratory 1,747,766 2,200,000 452,234 20.56%
Net income
*Profit Margin = ×100
Revenues
Net income
Profit Margin = ×100
Revenues
7,199,000
× 100
= 34,200,000
= 21.05%
Summary
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Summary of Cost Allocation and Profit of Abdul Wadud Memorial Hospital at
a Glance in Case of Seat Rent
From the above table we see that, in this hospital the per seat expenses for general
bed is tk.190.40 and for cabin is tk.342.90. Against these expenses for per seat is
tk.250 for general bed and tk.450 for the cabin. As a result profit per seat tk.59.60
for the general bed and tk. 107.10 for the cabin. In here we also found that, the rate
of profit of both general and the cabin are almost same, but they earn more in cabin
per day rather than the general beds.
The hospital also has other five source of revenue, which are- outdoor, operation
theater (OT), food and nutrition, laboratory and transportation. Here we find that
profit form outdoor is highest rate (25.84%). The earning form operation theater is
13.82%, from food and nutrition 6.44%, from transportation 17.38%, and from
laboratory 20.56%. But we found that every sector earn with a good rate except the
food and nutrition sector. Because they consider that providing notorious food with
lower cost is a part of their service.
Recommendation
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The Abdul Wadud Memorial Hospital is the one of the familiar private hospital in
Khulna division. The hospital’s management is committed to provide the general
people the world class health service through in less expensive way. We think if
they follow the following recommendation, then they will be benefited according to
our opinion.
We allocate the overhead cost on the basis of weighted revenue. Through our
calculation we found that profit margin of general seat is 23.84%, whereas gross
profit is 21.05%. We think that as a service related organization this profit margin is
all most satisfactory. So we can say that general seat is the major source of their
earnings and we also find that most of the times here stay the crisis of general bed.
So the authority of ‘Abdul Wadud Memorial Hospital’ should increase their number
of general beds with same level of facilities.
In case of cabin, cost per seat is 342.90 taka against revenue 450.00 taka. So they
earn 107.10 taka profit per cabin. But on an average in an effective year 100 days is
vacant. According to our opinion if the authority reduces their revenue per cabin,
then their number of vacancy day may be reduced. As a result the total amount of
profit may be increase.
Conclusion
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Overhead represents the cost of indirect material, indirect labor, and such other
expenses including services as cannot conveniently be charged to a specific unit.
Here, indirect materials reefer to material cost which cannot not be allocated to any
job or processes, but can be apportioned to or absorbed by jobs or processes.
Indirect labor or wages refer to wages other than direct wages, and indirect
expenses are also expenses other than direct expenses. Service departments are
organized to provide some needed service in a single, centralized place, rather than
having all units within the organization provides the service for them. Service
department costs are charged to operating department by an allocation process. In
terms, the operating department includes the allocated costs, form which overheads
are computed for purpose of costing product and services.
References
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Horngren C.T., Foster G. and Datar S. M. (1999). Cost Accounting, 10th edition,
Prentice Hall New Delhi-11001, pp.566-591.
Garrison Ray H., Noreen Eric W., and Brewer Peter C. (2007- 2008). Managerial
Accounting, 11th edition, McGraw- Hill Irwin.pp.716-730.