A healthcare company specializes in hip, knee and shoulder replacement operations, known as surgical procedures. As well as providing these surgical procedures, the company offers pre operation and post operation in-patient care, in a fully equipped hospital, for those patients who will be undergoing the surgical procedures.
Surgeons are paid a fixed fee for each surgical procedure they perform and an additional amount for any follow-up consultations. Post procedure follow-up consultations are only undertaken if there are any complications in relation to the surgical procedure. There is no additional fee charged to patients for any follow up consultations. All other staffs are paid annual salaries.
The company's existing costing system uses a single overhead rate, based on revenue, to charge the costs of support activities to the procedures. Concern has been raised about the inaccuracy of procedure costs and the company's accountant has initiated a project to implement an activity-based costing (ABC) system.
The project team has collected the following data on each of the procedures.
Procedure information Hip Knee Shoulder
Fee charged to patients per procedure RM 8,000 RM 10,000 RM 6,000
Number of procedures per annum 600 800 400
Average time per procedure 2.0hrs 1.2hrs 1.5hrs
Number of procedures per theatre session 2 1 4
In-patient days per procedure 3 2 1
Surgeon's fee per procedure RM 1,200 RM 1,800 RM 1,500
% of procedures with complications 8% 5% 10%
Surgeon's fee per follow up consultation RM 300 RM 300 RM 300
Cost of medical supplies per procedure RM 400 RM 200 RM 300
The project team has obtained the following information about the support activities:.
Activity Cost driver Overheads/annum
Theatre preparation for Number of theatre 864
each session preparations
Operating theatre usage Procedure time 1,449
Nursing and ancillary services In-patient days 5,428
Administration Sales revenue 1,216
Other overheads Number of procedures 923
(a) Calculate the profit per procedure for each of the three procedures, using the current basis for charging the cost of support activities to procedures.
(b) Calculate the profit per procedure for each of the three procedures using activity-based costing.
(c) Discuss the ways in which the information obtained by the project team may be of benefit to the management of the company. Your explanation should be based on the case, stating the benefits/ disadvantages of the costing techniques employed and how it may affect the decision makes.