This first question was a ten mark question covering activity-based costing. Part (a) covered the calculations, asking candidates to calculate the activity-based cost per procedure. The setting for the question was a private hospital providing two types of procedures to patients.

The overheads included costs such as nursing costs and general facility costs, the costs for which were driven by the length of patient stay. This question was not as well answered as previous activity based costing questions.

In the question, there were 14,600 of procedure A being performed by the hospital each year and 22,400 of procedure B. The length of patient stay for each procedure was 24 hours and 48 hours respectively.

An example of a common error being made as regards nursing costs was that candidates would take the nursing costs and divide them by 72 hours (24 + 48) without first multiplying the number of hours for each procedure by the number of those procedures being carried out.

Even more worryingly, another common error was to take the nursing costs and derive a cost per procedure for A by dividing the nursing costs by 24, then for B, by dividing the nursing costs by 48.

This made absolutely no sense at all. It was these kinds of fundamental errors that meant marks for this question were not as high as usual.

Part (b) asked candidates to advise the finance director whether activity-based costing should be introduced, making reference to the findings in part (a).

Candidates should have observed that the main components of the overhead costs were nursing and general facility costs, both of which were driven by patient hours. Therefore, if patient hours were to be used as the basis of absorbing the overheads rather than simply the number of procedures, a fairer allocation of overheads could be achieved without the time and effort involved in implementing activity based costing.

Only a handful of answers identified this key point. It is important that candidates learn to stand back and look at the big picture in questions at this level, a skill that is very much needed when moving on to the professional level papers.

Please note that where advice is asked for as to whether to implement something, a conclusion should be given.