P6.35 LO 6.7 Job costing: medical practice MedWise is a large medical practice in Sydney, owned by Dr Wiseman, a medical entrepreneur, and staffed by salaried doctors. Until recently the practice had been managed by Wiseman's son, John. However, Dr Wiseman became concerned about his son's financial management and appointed a qualified accountant, Chris Farmer, as practice manager. Farmer was concerned about the lack of information about the cost of services provided for patients. He immediately implemented a service costing system that required doctors to keep detailed records of time spent on each medical procedure.

Each service cost included: professional labour costs, based on the doctor's time multiplied by the doctor's average salary rate of $225 per hour practice overhead costs, based on a predetermined overhead rate of 400 per cent of professional labour costs. The predetermined rate was based on the budget for the next year and estimated using the following formula: total budgeted practice costs - budgeted medical salaries Overhead rate budgeted medical salaries At a practice meeting, Farmer presented the following estimates of service costs and profits: Cost Fee Profit Standard consultation Pregnancy test $75 $105 $30 60 127.50 67.50 Blood test 60 195 135 As each of these services required the same amount of time, Farmer recommended that the doctors should focus on blood tests rather than on standard consultations or pregnancy tests. Required 1. Discuss how MedWise's overhead rate is calculated and compare this to the way overhead rates are usually calculated in manufacturing firms. 2. Discuss the costs and benefits of the service cost information provided by Farmer. 3. Do you agree with Farmer's advice? Explain why you agree or disagree.