Question

[The following information applies to the questions displayed below.) We Care 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 Center Professional salarles Patient services and supplies Building cost Cost $ 1,700,000 25,000 149,000 Cost Driver Professional hours Number of patients Square feet Driver Quantity 10,000 600 1,500 The two main surgical units and their related data follow. Service Hours Square Feet Patients General surgery 2,500 500 200 Orthopedic surgery 7,500 1,000 400 Orthopedic surgery requires more space for patients, supplies, and equipment.

We Care 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.

Answer 1

		The Activity Rates are calculated as follows:
1)		(A)	(B)		(A)/(B)
	Activity Cost pool	Total Cost	Total Activity		Activity Rate
	Professional Salaries	$        17,00,000.00	10000	Professional Hours	$           170.00	Per professional hours
	Patient Services and Supplies	$              25,000.00	600	Number of Patients	$             41.67	Per patient
	Building Cost	$          1,49,000.00	1500	Square Feet	$             99.33	Per square feet
2)			Activity Based Costing
		(A)		(B)		(C )		(A)*(B)	(A)*(C )
	Activity	Activity Rate		Cost driver quantity incurred		Cost driver quantity incurred		Overhead cost allocated (Deluxe)	Overhead cost allocated (Basic)
				General Surgery		Orthopedic Surgery		General Surgery	Orthopedic Surgery
	Professional Salaries	$                    170.00	Per professional hours	2500	Per Hour	7500	Per Hour	$       4,25,000.00	$       12,75,000.00
	Patient Services and Supplies	$                      41.67	Per Patient	200	Patients	400	Patients	$             8,333.33	$             16,666.67
	Building Cost	$                      99.33	Per Square feet	500	Square feet	1000	Square feet	$           49,666.67	$             99,333.33
	Total Overhead Cost assigned=(D)							$       4,83,000.00	$       13,91,000.00
	Number of Patients=(E)							$                 200.00	$                   400.00
	Average cost per patient=(D)/(E)							$             2,415.00	$               3,477.50
		(A)	(B)	(C )=(A)/(B)
		Total Cost	Number of Patients	Average cost per patient
	General Surgery	$          4,83,000.00	$                                   200.00	2415
	Orthopedic Surgery	$        13,91,000.00	$                                   400.00	3477.5