Question

Surgery Center is an outpatient surgical clinic that was profitable for many years, but Medicare has cut its reimbursements by as much as 30%. 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 activity cost pools and their cost drivers follow.

Activity Cost Pool	Cost		Cost Driver	Driver Quantity
Professional salaries	$	1,683,000	Professional hours		10,200
Patient services and supplies		28,520	Number of patients		620
Building cost		159,600	Square feet		1,520

The two main surgical units and their related data follow.

Service	Hours			Square Feet*			Patients
General surgery		2,600			610			410
Orthopedic surgery		7,600			910			210

* Orthopedic surgery requires more space for patients, supplies, and equipment.

Required:
1. & 2. Compute the cost per cost driver for each of the three activity cost pools. Use the results to allocate costs to both the general surgery and the orthopedic surgery units. Compute total cost and average cost per patient for both the general surgery and the orthopedic surgery units.
  

Answer 1

Step: 1 - Cost per each cost driver
Particulars	Calculation		Per unit Cost ($)
1. Professional Salaries per hour	=1683000/10200		165
2. Patient services and supplies/ Patients	=28520/620		46
3. Building Cost/ Sq ft	=159600/1520		105
Step: 2 - Cost of general surgery
Particulars	Requirement	Units	Per unit Cost ($)	Total Cost ($)
Professionals	2600	hrs	165	4,29,000.00
Patient services	410	Patients	46	18,860.00
Building Cost	610	Sq Ft	105	64,050.00
Total Cost				5,11,910.00
Average Cost				1,248.56
Step: 3 - Cost of Orthopedic surgery
Particulars	Requirement	Units	Per unit Cost ($)	Total Cost ($)
Professionals	7600	Hrs	165	12,54,000.00
Patient services	210	Patients	46	9,660.00
Building Cost	910	Sq Ft	105	95,550.00
Total Cost				13,59,210.00
Average Cost				6,472.43