Now it's time to take a second turn. We're going to look at the use of activity based costing in a service example. We're looking at a medical clinic that performs two types of surgery, general surgery and specialty surgery. It estimates that it's going to perform 800 general surgeries, 400 specialty surgeries in the upcoming year. It uses an activity based costing system with four cost pools and the following associated cost drivers to allocate its costs. Cost pools, or rent, cost of equipment, cost of patient service, and the physician salaries. They feel that rent and the equipment cost are driven by how many square feet each of the types of surgery occupies. Patient services is driven by the number of patients served, and physicians salaries are driven by physician hours spent on each respective type of surgery. We have some information about each of the cost drivers for our general surgery and our specialty surgery. You're being asked to determine the allocation rate for each cost pool. Determine how much total cost will be allocated to general cost will be allocated to general surgery and to specialty surgery, and then determine the average cost per patient for general surgery and specialty surgery. Take some time. Give it a try. When you're ready, come on back and we'll tackle it together at the lightboard. Welcome back to the lightboard once again. Still using activity-based costing. We're going to try to determine how much overhead to allocate to the general surgery patient, and how much to the specialty surgery patient. We have four cost pools. We have cost drivers, and we'll be able to go through the process of doing that allocation. Before we do any numbers, I want to point out one thing. You'll notice that two of these cost pools have as their cost driver square footage. When the company decides that the cost driver for more then one pool is the same thing, it would be possible if we wanted to combine these two pools into one. We can call it Rent and Equpment. The pool would be $150,000. And we would allocate the pool of $150,000 to square feet. We'll keep them separate from that for now. We'll get more practice doing the allocation rates and the allocation. But know that we could, because these costs are driven by the same driver, combine them into one pool. Let's take a look here. Rent, let's determine the allocation rate for the cost pool for rent. We've got overhead costs of $50,000. We are going to divide that by the estimated amount of the cost driver which is square footage. We have a total square footage of 2,500 square feet. So if we take our $50,000 and divide that by 2,500 square feet, we have an allocation rate of $ 20 per square foot. Let's do the same thing for the equipment cost pool. We have a pool of $100,000. We have a total estimated square feet of 2,500. So that gives us an allocation rate for that pool of $40 per square foot. Now of course if we had combined these two together into one pool, rather than having a $20 and a $40 dollar rate we would've had a $60 per square foot rate to allocate the dollars in the rent and equipment pool. That would've totaled $150,000. Lets go to Patient Services. We have a pool of $60,000. The cost driver the company has decided is the number of patients. And the total number of patients expected is 1200, and so we're going to get a per patient rate, the allocation rate would be $50 per patient. And then finally, the largest cost pool the physician salaries, $3,200,000. And the cost driver here is the number of hours the physicans work. We have 16,000 hours. So we have a rate per physician hour to use as our allocation rate of, I believe that's going to be 200, yeah 200, per physician hour. Now let's allocate these costs to each of these two types of procedures, the general and the specialty surgery. $20 per square foot. And we're going to multiply that by the 1,000 square feet that general surgery occupies. So that gives us $200,000, I think. $20,000. And that $20,000 is going to be spread over a total of 800, I'll call it units. So that's how many patients we have okay? And so that will give us for general surgery $25. So $25 of rent will be allocated to each unit of general surgery. If we look at the specialty surgery, we'd be allocating $20 per square foot times the 1500 square feet that specialty surgery occupies. And that's going to be spread over the 400 units which will give us a rate of $75 allocated to a specialty surgery. Let's do the same thing with equipment. We've got a rate per square foot and we're going to multiply that times the number of square feet. Divide by our 800 units of general surgery to give us a cost per surgery. Let's see, $50. And then do the same thing here for specialty, $40 per square foot times 1,500 square feet over the 400 units, gives us 150. Doing well, doing well. Let's move to patient services. We have $50 per patient and we're expecting 800 patients. And we're dividing that by the 800 units, or 800 patients, so that would be $50 for a general surgery. Likewise for the specialty surgery, 50 per patient, we're expecting 400 patients, divide that by 400 units or 400 patients, 50. So our patient services would be the same thing and it would be allocated the same amount for general and specialty surgery. And then we'll get to the physician hours here. We've got 200 per hour, we're expecting 4,000 physician hours devoted to general surgery and we'll spread that over our 800 surgeries and that would be $1,000 for a general surgery. If we do the same for our specialty, 200 per hour, we're expecting a lot more hours, more complicated procedures. Spread that over our 400 patients and we've got $6,000 per patient. So we can total these. Let's see if we can add these in our head. That's $1,125 overhead allocated to each general surgery experience. And then let's see. It's 125, 275, 6,275 that would be allocated to a specialty surgery. Great work.
