Question 1ab
| Procedure | A | B |
|---|---|---|
| $ | $ | |
| Surgical time and materials | 1,200 | 2,640 |
| Anaesthesia time and materials | 800 | 1,620 |
BH currently calculates the overhead cost per procedure by taking the total overhead cost and simply dividing it by the number of procedures, then rounding the cost to the nearest 2 decimal places. Using this method, the total cost is $2,475·85 for Procedure A and $4,735·85 for Procedure B.
Recently, another local hospital has implemented activity-based costing (ABC). This has led the finance director at BH to consider whether this alternative costing technique would bring any benefits to BH. He has obtained an analysis of BH’s total overheads for the last year and some additional data, all of which is shown below:
| Cost | Cost driver | $ |
|---|---|---|
| Administrative costs | Administrative time per procedure | 1,870,160 |
| Nursing costs | Length of patient stay | 6,215,616 |
| Catering costs | Number of meals | 966,976 |
| General facility costs | Length of patient stay | 8,553,600 |
| Total overhead costs | 17,606,352 |
| Procedure | A | B |
|---|---|---|
| No. of procedures | 14,600 | 22,400 |
| Administrative time per procedure (hours) | 1 | 1·5 |
| Length of patient stay per procedure (hours) | 24 | 48 |
| Average no. of meals required per patient | 1 | 4 |
Required:
(a) Calculate the full cost per procedure using activity-based costing. (6 marks)
(b) Making reference to your findings in part (a), advise the finance director as to whether activity-based costing should be implemented at BH. (4 marks)