Question 1

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

                                                                                                            RM'000          

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

Required

(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.