Question

Surgery Center is an outpatient surgical clinic that 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 as does information on the two main surgery centers.

Cost Center	Cost	Cost Driver	Driver Quantity
Professional Salaries	900,000	Professional hours	17,000
Patient Services & supplies	40,000	Number of patients	700
Building Cost	250,000	Square feet	5,000
Service	Hours	Square Feet	Patients
General surgery	6,000	1,750	500
Orthopedic surgery	11,000	3,250	200

1. Assume costs are allocated based on the number of patients only. Compute the average cost per patient.

2. Compute the cost applied to the general surgery center using the predetermined overhead rate computed in Question 1.

3. Compute the cost applied to the orthopedic surgery center using the predetermined overhead rate computed in Question 1.

4. Using activity-based costing to allocate overhead, compute the cost per driver for each of the three cost centers presented above. Then use that information to calculate the amount of overhead applied to the general surgery center. Only provide the total amount overhead allocated to the general surgery center in the blank.

5. Using activity-based costing to allocate overhead, compute the cost per driver for each of the three cost centers presented above. Then use that information to calculate the amount of overhead applied to the orthopedic surgery center. Only provide the total amount overhead allocated to the orthopedic surgery center in the blank.

Answer 1

1.

Average cost per patient = Total costs / Total number of patients

Average cost per patient = $1,190,000 / 700 = $1,700 per patient

2.

Cost applied to general surgery center = 500 * $1,700 = $850,000

3.

Cost applied to orthopedic surgery center = 200 * $1,700 = $340,000

4.

Cost centers	Cost per driver
Professional salaries	$52.94118 ($900,000/17,000)	per professional hour
Patient services and supplies	57.14286 (40,000/700)	per patient
Building costs	50 (250,000/5,000)	per square feet

Overhead applied to general surgery center:

Professional salaries (6,000*$52.94118)	$317,647
Patient services and supplies (500*$57.14286)	28,571
Building costs (1,750*$50)	87,500
Total overhead applied	$433,718

5.

Cost centers	Cost per driver
Professional salaries	$52.94118 ($900,000/17,000)	per professional hour
Patient services and supplies	57.14286 (40,000/700)	per patient
Building costs	50 (250,000/5,000)	per square feet

Overhead applied to orthopedic surgery center:

Professional salaries (11,000*$52.94118)	$582,353
Patient services and supplies (200*$57.14286)	11,429
Building costs (3,250*$50)	162,500
Total overhead applied	$756,282