1 QUESTION ONE Apollo Hospital specialises in hip, knee and shoulder replacement operations, known as surgical procedures. As well as providing these surgical procedures the company offers pi operation and post operation in patient care, in a fully equipped hospital, for those patiem who will be undergoing the surgical procedures. Surgeons are paid a fixed fee for each surgical procedure they perform and an additional amount for any follow-up consultations. Post procedure follow-up consultations are only undertaken if there are any complications in relation to the surgical procedure. There is no additional fee charged to patients for any follow up consultations. All other staff are paid annual salaries. The hospital's existing costing system uses a single overhead rate, based on revenue, to charge the cost of support activities to the procedures. Concern has been raised about the inaccuracy of procedure costs and the company's accountant has initiated a project to implement an activity-based costing (ABC) system. The project team has collected the following data on each of the procedures. Procedure information Hip Knee Shoulder Fee charged to patients per $8,000 $10,000 $6,000 procedure Number of procedures per annum 600 800 400 Average time per procedure 2 hours 1.2 hours 1.5 hours Number of procedures per theatre 2 1 session In-patient days per procedure 3 2 Surgeon's fee per procedure $1,200 $1,800 $1,500 % of procedures with complications 8% 5% 10% Surgeon's fee per follow up $300 $300 $300 consultation Cost of medical supplies per $400 $200 $300 procedure The project team has obtained the following information about the support activities: Activity Cost driver Total overhead costs (Amount in $) Theatre preparation for each session Number of theatre 864,000 preparations Operating theatre usage Procedure time 1,449,000 Nursing and ancillary services In-patient days 5,428,000 Administration Sales revenue 1,216,000 Other overheads Number of procedures 923,000 REQUIRED: 4 1 (a) Calculate the profit per procedure for each of the three procedures using activity based costing. (b) Explain three benefits for the management of the company from the information obtained by the project team