Apollo Hospital specialises in hip, knee and shoulder replacement operations, known as surgical procedures. As well as providing these surgical procedures the company offers pre operation and post operation in-patient care, in a fully equipped hospital, for those patients 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 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 inaccuracy of procedure costs and the company's accountant has initiated a project to implement an 

activity-based costing (ABC) system. Concern has been raised about the The project team has collected the following data on each of the procedures.

 

Procedure information Hip Knee Shoulder

Fee charged to patients per procedure 8 000$ 9 000$ 6 000$

Number of procedures per annum 500 1000 500

Average time per procedure 2 hours 1 hour 2 hours

Number of procedures per theatre session 1 2 2

In-patient days per procedure 3 2 1

Surgeon's fee per procedure 1250$ 1100$ 1500$

% of procedures with complications 6% 4% 5%

Surgeon's fee per follow up consultations 400$ 300$ 400$

Cost of medical supplies per procedure 500$ 300$ 400$

The project team has obtained the following information about the support activities:

Activity Cost driver Overhead costs

Theatre preparation for each session Number of theatre preparations 800 000

Operating theatre usage Procedure time 1 200 000

Nursing and ancillary services In-patient days 6 000 000

Administration Sales revenue 1 200 000

Other overheads Number of procedures 1 000 000

REQUIRED

(a) Calculate the profit per procedure for each of the three procedures using the current basis for charging the costs of support activities to procedure (single overhead rate).

(b) Calculate the profit per procedure for each of the three procedures using activity-based costing (ABC).