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 . 2,520,000 Professional hours 12,000
Patient services and supplies 44,000 Number of patients 800
Building cost 255,000 Square feet 1,700
The two main surgical units and their related data follow.
Service Hours Square Feet Patients
General surgery 3,500 700 500
Orthopedic surgery 8,500 1,000 300
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.

The total Costs allocated to General surgery is $ 867500.

The total Costs allocated to  Orthopedic surgery is  $1951500.

Average Cost per patient of General surgery= $1735

Average Cost per patient of Orthopedic surgery= $6505

Explanation:

Surgery Center

Activity Cost Pool              Cost         Cost Driver         Driver Quantity

Professional Salaries  2,520,000    Professional hours       12,000

Patient Ser. & Supplies 44,000        Number of patients        800

Building cost             255,000             Square feet                 1,700

                       Service Hours       Square Feet          Patients

General surgery 3,500                    700                         500

Orthopedic surgery 8,500            1,000                         300

Cost Per Cost Driver

Professional Salaries/  Professional hours =2,520,000 /12,000=210

Patient Ser. & Supplies/ Number of patients  = 44,000  /800= 55

Building cost / Square feet  =255,000 /1700= 150

We apply the rates to both the surgeries to get the costs.

Total Costs

                      Service Hours       Square Feet          Patients        Total

General surgery 3,500*210                700*150             500*55

Costs  $           735000                   105000              27500      867500                    

Orthopedic surgery 8,500*210           1,000*150             300*55

 Costs      $         1785000             150,000               16500     1951500

The total Costs allocated to General surgery is $ 867500.

The total Costs allocated to  Orthopedic surgery is  $1951500.

Total No of Patients = 800

Total Costs = $ 2819,000

We find the average by dividing the total cost by the number of the patients.

Average Cost Rate per patient = 2819,000/800=  3523.75

Average Cost per patient of General surgery= 867500/500= $1735

Average Cost per patient of Orthopedic surgery=1951500/300= $6505