LM Hospital is a private hospital, whose management is considering the adoption of an activitybased costing (ABC) system for the year 2001/02. 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 oftime 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 mark-up of 135%. With the proposed ABC system, the management expects to use a mark¬

up 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 & 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 2001/02.

Required:

(a) 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.
(ij Calculate the prices that would be charged under each method for the two types of operation. (Your answer should include an explanation and calculations ofthe cost drivers you have used.) (10 marks)
(ii) Comment on the results of your calculations and the implications for the proposed pricing policy. (5 marks)

(b) 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. (15 marks)

(c) Explain whether the concept of throughput accounting could be used in a hospital

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The expected costs for 2001/02 are: Nursing services and administration Linen and laundry Kitchen and food costs (3 meals a day) Consultant surgeons' fees Insurance of buildings and general equipment Depreciation of buildings and general equipment 9,936,000 920,000 2,256,000 5,250,000 60,000 520,000 Operating theatre 4,050,000 Pre-operation costs 1,260,000 Medical supplies - used in the hospital wards 1,100,000 Pathology laboratory (where blood tests etc are carried out) 920,000 Updating patient records 590,000 Patient/bed scheduling 100,000 Invoicing and collections 160,000 Housekeeping activities, including ward maintenance, window cleaning etc 760,000