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The Physically and Intellectually Disabled Council (PIDC) has the responsibility for distributing government grants to fund support services for the physically or intellectually disabled people. The managing director of PIDC would like to ensure that grants are distributed on an equitable basis, and asks Ms Mary Parker, the Council’s management accountant, to estimate the cost of providing institutional care to clients with such disabilities. Parker decides to use activity-based costing (ABC) in one of the state’s larger institutions, Body Recuperate. Working with a project team at Body Recuperate, she identified activity cost pools listed Table 1 below to obtain an initial estimate of the costs of the services provided.
Table 1: List of major activity cost pools at Body Recuperate
Transport clients (internal)
Transport clients (external)
Provide occupational therapy
Run sheltered workshop
Although the needs of individual clients vary tremendously, the project team identifies three major service types: high- dependency support, low-dependency support and outpatient support. High-dependency and low-dependency clients live at Body Recuperate, while outpatients attend the centre on a daily basis. The average number of activities and their associated cost drivers (activity measures) required to support each of the three types of clients each day has to be estimated. You will need to estimate the total number of patients for each category. Keep in mind that in doing this project, your main task is creating the data. The real challenges in management accounting are not computational but data insufficiency, unavailability and interpretation. It is important to learn how to address these challenges.
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1. Construct an Excel spreadsheet to:
a) calculate the cost per unit of activity driver for each of the activities identified by the project team. You will need to estimate the total costs of
providing each of the major services in Table 1.
b) calculate the daily cost of supporting:
(i) A high-dependency client.
(ii) A low-dependency client,
(iii) an outpatient client. You will need to decide which of the services are provided and their amount for each group.
Ms Mary Parker would like to discuss her decision to use ABC to estimate the costs at the case organisation (Body Recuperate) for the purpose of equitable fund distribution with the managing director. Write a report for Parker outlining the benefits, costs and limitations of Activity Based costing. In preparing the report, you are required to research at least three articles about ABC and apply them to your report (word limit: 800).
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