David Thomas, the controller of Western Dialysis was concerned, however, that the procedures currently being used to assign common expenses may not be representative of the underlying use of the common resources by the two different procedures. He wanted to understand their costs better so that Western's managers could make more-informed decisions about extending or contracting products and services and about where to look for process improvements. Thomas decided to explore whether activity-based costing principles could provide a better indication of the underlying cost and profitability of HD and PD treatments. In his initial analysis, Thomas decided to focus on the indirect service costs since they represented such a large proportion of the total cost. After some analysis, he was able to spiit the indirect service costs of $1,800,000 into three cost categories: Equipment Costs ($140,000}, Nursing Services ($860,000) and General Overhead {$800,000}. But rather than continue to use the RCC method for allocating Equipment |Costs and Nursing Services, he asked the clinic staff for their judgments about how these costs should be assigned. 0n the basis of the staff's experience and judgment, they felt that HD treatments used about 85% of these resources, and PD about 15%. Thus, he felt comfortable tracing the Equipment Costs and Nursing Services directly to the HD and PD treatments as direct costs. His new estimate of direct costs sinnifinantlv shrunk the nnmnrtinn of indirect mete (See Table 7' helnw'l