Question

Surgery Center is an outpatient surgical clinic that was profitable for many years, but Medicare has cut its reimbursements by as much as 30%. As a result, the clinic wants to better understand its costs. It decides to prepare an activity-based cost analysis, including an estimate of the average cost of both general surgery and orthopedic surgery. The clinic’s three activity cost pools and their cost drivers follow.

Activity Cost Pool Cost Cost Driver Driver Quantity
Professional salaries . 2,520,000 Professional hours 12,000
Patient services and supplies 44,000 Number of patients 800
Building cost 255,000 Square feet 1,700
The two main surgical units and their related data follow.
Service Hours Square Feet Patients
General surgery 3,500 700 500
Orthopedic surgery 8,500 1,000 300
Orthopedic surgery requires more space for patients, supplies, and equipment.
Required:
1.&2.
Compute the cost per cost driver for each of the three activity cost pools. Use the results to allocate costs to both the general surgery and the orthopedic surgery units. Compute total cost and average cost per patient for both the general surgery and the orthopedic surgery units.

Answer 1

The total Costs allocated to General surgery is $ 867500.

The total Costs allocated to Orthopedic surgery is $1951500.

Average Cost per patient of General surgery= $1735

Average Cost per patient of Orthopedic surgery= $6505

Step-by-step explanation:

Surgery Center

Activity Cost Pool Cost Cost Driver Driver Quantity

Professional Salaries 2,520,000 Professional hours 12,000

Patient Ser. & Supplies 44,000 Number of patients 800

Building cost 255,000 Square feet 1,700

Service Hours Square Feet Patients

General surgery 3,500 700 500

Orthopedic surgery 8,500 1,000 300

Cost Per Cost Driver

Professional Salaries/ Professional hours =2,520,000 /12,000=210

Patient Ser. & Supplies/ Number of patients = 44,000 /800= 55

Building cost / Square feet =255,000 /1700= 150

We apply the rates to both the surgeries to get the costs.

Total Costs

Service Hours Square Feet Patients Total

General surgery 3,500*210 700*150 500*55

Costs $ 735000 105000 27500 867500

Orthopedic surgery 8,500*210 1,000*150 300*55

Costs $ 1785000 150,000 16500 1951500

The total Costs allocated to General surgery is $ 867500.

The total Costs allocated to Orthopedic surgery is $1951500.

Total No of Patients = 800

Total Costs = $ 2819,000

We find the average by dividing the total cost by the number of the patients.

Average Cost Rate per patient = 2819,000/800= 3523.75

Average Cost per patient of General surgery= 867500/500= $1735

Average Cost per patient of Orthopedic surgery=1951500/300= $6505