Lancaster Orthopedics specializes in hip, knee, and shoulder replacement surgery. In addition to the actual surgery, the company provides its patients with preoperative and postoperative inpatient care in a fully equipped hospital. Lancaster pays its surgeons a fixed fee for each surgical procedure they perform.
The company provides doctors and patients a variety of support services during treatment and allocates the cost of these activities through the company’s costing system, which uses a single overhead rate. Currently, the company uses an allocation rate of 65% of the surgical fee charged to the patient.
Managers have expressed concern that the current system is producing inaccurate costs and profitability for the joint replacement procedures. As a result, Bree Lancaster, the company’s controller, initiated a study to explore the potential for implementing an activity-based costing system. She has collected the following data on each of the procedures.
HipKneeShoulderFee charged to patient$8,000$10,000$6,000Number of procedures per year600800400Average time per procedure2.0 hours1.2 hours1.5 hoursNumber of procedures per operating room session214Inpatient days per procedure321Surgeon’s fee per procedure$1,200$1,800$1,500Medical supplies per procedure$400$200$300
After analyzing the company’s support activities, Bree determined that five activity cost pools would be sufficient for the company. The proposed activity cost pools, along with the proposed cost drivers, are presented below.
ActivityCost DriverTotal CostOperating room preparationNumber of sessions$864,000Operating room useProcedure time1,449,000Nursing and ancillary servicesInpatient days5,415,000AdministrationSales revenue1,216,000MiscellaneousNumber of procedures936,000$9,880,000
Collapse question part(a)Calculate the profit per procedure for each of the three procedures using the current basis for allocating overhead. (Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)
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