Question

Patient Health is an outpatient surgical clinic that was profitable for many years, but Medicare has cut its reimbursements by as much as 50%. 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 cost centers and their cost drivers follow.

Cost Driver Driver Quantity Cost Center Professional salaries Patient services and supplies Building cost Cost $2,520,000 Professional hours 39,000 Number of patients 441,000 Square feet 10,000 600 3,500 The two main surgical units and their related data follow. Service General surgery Orthopedic surgery Hours 4,000 6,000 Patients 450 150 Square Feet* 800 2,700 Orthopedic surgery requires more space for patients, supplies, and equipment.

Answer 1

Calculate activity rate :

	Overhead cost	Activity drivers		Activity rate
Professional salaries	2520000	10000	Profession hours	252	per professional hour
Patients services and supplies	39000	600	No of patients	65	per patients
Building cost	441000	3500	Square feet	126	per square feet

General surgery :

General surgery	Activity rate		Activity driver incurred	Overhead assigned
Professional salaries	252	per professional hour	4000	1008000
Patient services and supplies	65	Per patients	450	29250
Building cost	126	Per square feet	800	100800
Total overhead cost assigned				1138050

Orthopedic surgery

Orthopedic surgery	Activity rate		Activity driver incurred	Overhead assigned
Professional salaries	252	per professional hour	6000	1512000
Patient services and supplies	65	Per patients	150	9750
Building cost	126	Per square feet	2700	340200
Total overhead cost assigned				1861950