General Hospital provides private healthcare and currently offers three operations: feet, shoulder and hip and the following data is available for them:

Operations	Patient Fee per operation	Number of operations budgeted
	£
Feet	3,600	160
Shoulder	4,500	200
Hip	4,850	240
Total		600

Although 2019/20 was a successful year, the Hospital Board expressed concern that overheads had risen and concluded that identifying better costing data and cost management should be a priority for 2020/21. A competitor has recently opened a new facility and as a result there is likely to be pressure on pricing. The hospital is considering diversifying and offering additional operations and services and needs to ensure that pricing is competitive for these.

The Finance Director has read a recent report on overhead allocation and Activity Based Costing (ABC) and is keen to consider a range of options going forward. The current approach to overhead allocation is to apportion overheads on a unit basis (ie shared across the total number of operations in the budget).

The Finance Director would now like to consider the merits of 3 potential options:

• Option 1 – Keep the existing approach of overhead allocation which allocates an identical share of the total overhead cost to an operation
• Option 2 – Allocate overheads to operations using surgeon’s operation time in hours (ie total labour hours) as a basis
• Option 3 - Introduce Activity Based Costing (ABC) using 4 cost drivers (which are provided in this document)

You have been employed to lead on the project and will produce a professional report which analyses the difference between the 3 options above.

The ultimate aim is to help the Finance Director make a decision whether to maintain the current simplistic approach (Option 1) to overhead allocation or whether to implement Option 2 or Option 3. The following data is available for you to use in your analysis:

Direct costs per operation	Feet	Shoulder	Hip
Direct material: Surgical material	£600	£800	£950
Direct labour: Surgeon fee*	£800	£1,200	£1,400

*This is paid to the surgeon upon completion of each operation and is based on operation time and complexity

Overhead analysis

Cost pools	Cost pools for ABC	£
Pool 1	Theatre preparation	200,000
Pool 2	Surgeon’s Operation time	170,000
Pool 3	Consultant follow up	300,000
Pool 4	Overnight hospital stay	540,000
	Total overheads	1,210,000

This cost driver data is per operation:

		Feet	Shoulder	Hip
Cost driver 1	Theatre preparation (hours)	0.5	2	4
Cost driver 2	Surgeon’s operation time (hours)	4	6	5
Cost driver 3	Consultation follow up (hours)	1	3	7
Cost driver 4	Overnight hospital stay (days)	0	4	6

Required:

1. Total cost per operation for Option 1, 2 and 3 (rounding accepted)

2. Profit margin (£ and %) per operation for Option 1, 2 and 3 (rounding accepted)