QUESTION: 13

A healthcare company specializes 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 are only 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 company’s existing costing system uses a single overhead rate, based on revenue, to charge the costs of support activities to the procedures. Concern has been raised about the inaccuracy of procedure costs and the company’s accountant has initiated a project to implement an activity-based costing (ABC) system. The project team has collected the following data on each of the procedures.

Calculate the profit per procedure for each of the three procedures, using the current basis for charging the costs of support activities to procedures.

What was the profit for the knee procedure?

$1510
$1210
$1390
$1485

Answer(s): B

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QUESTION: 14

A healthcare company specializes 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 are only 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 company’s existing costing system uses a single overhead rate, based on revenue, to charge the costs of support activities to the procedures. Concern has been raised about the inaccuracy of procedure costs and the company’s accountant has initiated a project to implement an activity-based costing (ABC) system. The project team has collected the following data on each of the procedures.

Calculate the profit per procedure for each of the three procedures using activity-based costing.
What was the profit for the knee procedure, using ABC costing?

$2466
$781
$1808
$2305

Answer(s): A

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QUESTION: 15

Assume that you have made profit calculations based on standard profit calculation methods and activity based costing methods.

In which ways will this information be beneficial to the management team?
Select all the true statements.

Under an activity based costing system the various support activities that are involved in the process of making products or providing services are identified.
The cost drivers that cause a change to the cost of activities are also identified and used as the basis to attach activity costs to a particular product or service.
Through the tracing of costs to product in this way ABC establishes less accurate costs for the product or service.
The identification of cost drivers provides information to management to enable them to take actions to improve the overall profitability of the company.
Operational analysis will provide information to management on how costs can be incurred and managed.

Answer(s): A,B,D

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QUESTION: 16

Explain the advantages of management participation in budget setting and the potential problems that may arise in the use of the resulting budget as a control mechanism.
Select all the correct answers.

A purposes of budgeting is to act as a control mechanism, with actual results being compared against budget.
Another purpose of a budget is to set targets to motivate managers and optimize their performance.
The participation of managers in the budget setting process has several advantages. Managers are more likely to be motivated to achieve the target if they have participated in setting process has several advantages. managers are more likely to be motivated to achieve the target if they have participated in setting the target.
Participation in budget setting can reduce the information asymmetry gap that can arise when targets are imposed by senior management. Imposed targets are likely to make managers feel demotivated and alienated and result in poor performance.
Participation in budget setting can cause problems; in particular, managers may attempt to negotiate budgets that they feel are easy to achieve which gives rise to “budget padding” or budgetary slack.
Managers will not ‘empire build’ because they don’t believe that the size of their budget reflects their importance within the organization.

Answer(s): A,B,C,D,E

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