Question

Lancaster Orthopedics specializes in hip, knee, and shoulder replacement surgery. In addition to the actual surgery, the company provides its patients with preoperative and postoperative inpatient care in a fully equipped hospital. Lancaster pays its surgeons a fixed fee for each surgical procedure they perform.
The company provides doctors and patients a variety of support services during treatment and allocates the cost of these activities through the company's costing system, which uses a single overhead rate. Currently, the company uses an allocation rate of 65% of the surgical fee charged to the patient.
Managers have expressed concern that the current system is producing inaccurate costs and profitability for the joint replacement procedures. As a result, Bree Lancaster, the company's controller, initiated a study to explore the potential for implementing an activity-based costing system. She has collected the following data on each of the procedures.
After analyzing the company's support activities, Bree determined that five activity cost pools would be sufficient for the company. The proposed activity cost pools, along with the proposed cost drivers, are presented below.

Required
a. Calculate the profit per procedure for each of the three procedures using the current basis for allocating overhead.
b. Calculate the profit per procedure for each of the three procedures using the proposed activity-based costing system.
c. Discuss the causes of the difference in profitability between the two costing systems.
d. Based on the profit calculations, what action do yourecommend?


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  • CreatedFebruary 21, 2014
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