P13-2 Pricing/ABC/throughput accounting Time allowed: 45 minutes LM Hospital is a private hospital whose management is considering

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P13-2 Pricing/ABC/throughput accounting Time allowed: 45 minutes LM Hospital is a private hospital whose management is considering the adoption of an activity-based costing (ABC) system for the year 2010/11.

The main reason for its introduction would be to provide more accurate information for pricing purposes. With the adoption of new medical technology, the amount of time that some patients stay in hospital has decreased considerably, and the management feels that the current pricing strategy may no longer reflect the different costs incurred.

Prices are currently calculated by determining the direct costs for the particular type of operation and adding a markup of 135%. With the proposed ABC system, the management expects to use a markup for pricing purposes of 15% on cost. This percentage will be based on all costs except facility sustaining costs. It has been decided that the hospital support activities should be grouped into three categories – admissions and record keeping, caring for patients, and facility sustaining.

The hospital has four operating theatres that are used for 9 hours a day for 300 days a year. It is expected that 7,200 operations will be performed during the coming year. The hospital has 15 consultant surgeons engaged in operating theatre work and consultancy. It is estimated that each consultant surgeon will work at the hospital for 2,000 hours in 2010/11.

The expected costs for 2010/11 are:

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Other information for 2010/11:

image text in transcribedInformation relating to specific operations for 2010/11:

image text in transcribedRequired 1 Before making the final decision on the costing/pricing system, management has selected two types of operation for review: an ear, nose and throat (ENT) operation and a cataract operation.

(a) Calculate the prices that would be charged under each method for the two types of operation. (Your answer should include an explanation and calculations of the cost drivers you have used.)

(b) Comment on the results of your calculations and the implications for the proposed pricing policy.
2 Critically assess the method you have used to calculate the ABC prices by selecting two items/categories above which you feel should have been dealt with in a different way.
3 Explain whether the concept of throughput accounting could be used in a hospital.

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