CAMC Session 4.1.

Full costing - Traditional costing - ANSWER

Exercise 1: Calculating the full cost using various traditional approach

1) Cost per treatment
a) Allocation base = Treatments
HD PD TOTAL
Treatments 8,000 4,000 12,000
Direct costs (supplies) 550,000 310,000 860,000
Overheads before allocation 1,170,000
OVH recovery rate 97.500
Overheads after allocation 780,000 390,000 1,170,000
Total Full cost 1,330,000 700,000 2,030,000
Average Full cost/treatment 166.25 175.00
b) Allocation base = Direct costs
HD PD TOTAL
Overheads before allocation 1,170,000
OVH recovery rate 1.360
Overheads after allocation 748,256 421,744 1,170,000
Total Full cost 1,298,256 731,744 2,030,000
Average Full cost/ treatment 162.28 182.94

2) Cost per treatment using a detailed information

Nursing A-level B-level TOTAL

OVH allocated to Nursing 600,000 210,000 810,000
Full-time equivalent (FTE) 5 2.5 7.5
OVH allocation rate 120,000 84,000
Nursing HD PD TOTAL
A-level staff (€) 600,000 - 600,000
B-level staff (€) 84,000 126,000 210,000
Total OVH_nursing costs 684,000 126,000 810,000

HD PD TOTAL
Dialyzer machine (€) 342,000 18,000 360,000

Full cost HD PD TOTAL

Direct costs 550,000 310,000 860,000
Indirect costs 1,026,000 144,000 1,170,000
Total Full cost 1,576,000 454,000 2,030,000
Average Full cost/ treatment 197.00 113.50

EDHEC Business School | Prepared by Claire Grevet M1BM CAMC 2017-18 1

3) Comment on your answer in questions 1 and 2.

According to the twp approaches used in question1, the HD treatment is cheaper than the PD
treatment. This might not meet our first intuition as PD seems to be less intensive in terms of
resource consumption than HD.

Methods in question 1 are assuming that each level of treatment occurs about the same cost.
Methods use volume-driven cost drivers and are closely related to the single cost driver models
discussed in class.

It is in fact a more traditional cost allocation method (e.g. similar to models that use output or
input related cost drivers like direct labor costs, direct machine hours etc.) These methods do not
recognize that certain types of treatments require more resources than others.
The cost allocation methods does not seem to capture this (since HD is even shown to be
cheaper).

The second approach asks the question which activities are performed for HD and PD treatment.
It takes into account that HD-patients require more resources: that is more qualified personal and
nursing time and specialized equipment in comparison to PD-patients. This is why HD is also
shown as more expensive per unit of treatment under the second approach.
The second approach is therefore also better for decision-making (management). In the first
method, managers may get a false idea that HD treatments are cheaper than PD treatments. They
may shift their patients to in-hospital treatment, while in fact treatment at home (if possible) is
cheaper. The second approach follows the ABC-idea.

Remark : The numbers shown in this exercise are for educational purpose only; they should not
be regarded as the real cost of a dialysis treatment neither at home nor in hospital.
However, this exercise is testament to the need for cost accounting in all types of institutions,
profit-oriented companies and non-profit organisations.

EDHEC Business School | Prepared by Claire Grevet M1BM CAMC 2017-18 2

Exercise 2: Full costing with product and service cost centers
1/ Take a look at the six cost centers and distinguish the product cost centers from the
service cost centers
Explanation: the six cost centers consist of departments of the company. However, these six
cost pools differ in their connection with the cost objects (which are flags and banners).

The cutting room, the flags department and the banners department are manufacturing
departments, they have a clause-and-effect relationship with the products.

The raw materials stores division, the canteen division and the maintenance are non-
manufacturing divisions (like support functions). They are providing services to the three
manufacturing departments. There exist some cause-and-effect relationship between these
service cost centers and the product cost centers, whereas there is no obvious cause-and-
effect relationship between a service cost center and a cost object.

Remember that for accurate cost assignment, allocation bases should be significant
determinants of the costs (i.e. cause-and-effect allocations).As a result:
step1: Assign all overheads initially to cost centres whatever they are,
step2: Allocate the overheads of service cost centres to the product cost centers.

3 product cost centers 3 Service cost centers

Cutting Banners Raw material
Flags Canteen Maintenance
room stores

To make the best of this exercise, you are encouraged to use your Excel spreadsheet. Design
the table overleaf, code the given data and use Excel formulas for the computations.
This should improve your Excel skills, which are a basic requirement of the Real world,
whatever your position.

EDHEC Business School | Prepared by Claire Grevet M1BM CAMC 2017-18 3

 2/calculate the overhead absorption rate for each machine hour and each DLH
Step 1 : allocate specific cost centre overheads to the relevant cost centre
Step 2 : Apportion general overheads between cost centres
Step 3 : Total allocated and apportioned overheads to find the total for each cost centre

Cutting Raw material

Total Flags Banners Canteen Maintenance
room stores
(€) (€) (€) (€) (€) (€) (€)
Indirect wages 147 200 6 400 19 500 20 100 41 200 15 000 45 000
Consumable materials 54 600 5 300 4 100 2 300 18 700 24 200
Plant depreciation 84 200 31 200 17 500 24 600 2 500 3 400 5 000
Power (a) 31 700 5 389 12 046 10 144 951 2 536 634
Heat and Light (b) 13 800
Rent and rates (b) 14 400 11 120 13 900 9 730 2 085 3 475 1 390
Building Insurance (b) 13 500
Total 359 400 59 409 67 046 66 874 46 736 43 111 76 224

Stores (c) 29 210 5 842 5 842 (46 736) - 5 842

Canteen (d) 2 694 18 476 21 940 - (43 111) -
Maintenance (e) 1 887 37 731 42 448 - - (82 066)
Total 359 400 93 200 129 096 137 104 0 0 0
J : The costs of a Service cost center can be appportioned to an other Service cost center; at the end of Step 4, no
costs left in Service cost center
Step 6 : Calculate a cost centre overhead absorption rate for each product cost centres
Direct labour (hours) 112 000 7 000 48 000 57 000 - - -
Machine usage (hours) 87 000 2 000 40 000 45 000 - - -

Overheads per labour hour (€) 13,31 2,69 2,41

Machine hour rate (€) 46,60 3,23 3,05

(a) according % of power usage (d) according direct labour hours

(b) according area (m2) (e) according direct machine usage
(c) according value of issues

EDHEC Business School | Prepared by Claire Grevet M1BM CAMC 2017-18 4