38. (Activity-based costing and pricing) Covington Community Hospital has found itself under increasing pressure to be accountable for the charges it assesses its patients. Its current pricing system is ad hoc, based on pricing norms for the geographical area, and it only explicitly considers direct costs for surgery, medication, and other treatments. Covington’s controller has suggested that the hospital try to improve its pricing policies by seeking a tighter relationship between costs and pricing. This approach would make prices for services less arbitrary. As a first step, the controller has determined that most costs can be assigned to one of three cost pools. The three cost pools follow along with the estimated amounts and activity drivers.

Activity Center Amount Activity Driver Quantity Professional salaries $900,000 Professional hours 30,000 hours Building costs 450,000 Square feet used 15,000 sq. ft.

Risk management 320,000 Patients served 1,000 patients The hospital provides service in three broad categories. The services are listed below with their volume measures for the activity centers.
Service Professional Hours Square Feet Number of Patients Surgery 6,000 1,200 200 Housing patients 20,000 12,000 500 Outpatient care 4,000 1,800 300

a. Determine the allocation rates for each activity center cost pool.

b. Allocate the activity center costs to the three services provided by the hospital.

c. What bases might be used as cost drivers to allocate the service center costs among the patients served by the hospital? Defend your selections.