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Cost Drivers and Cost Allocation

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Health CO-op is an outpatient surgical clinic that was profitable for many years, but Medicare has cut its reimbursements by as much as 40%. As a results, the clinic wants to better understand its costs. It decides to prepare an activity-based cost analysis, including an estimate of the average cost of both general surgery and orthopedic surgery. The clinic's three cost centers and thier cost drivers are attached.

1. Compute the cost per cost driver for each of the three cost centers

2. Use the results from part 1 to allocate costs from each of the three cost centers to both the general surgery and the orthopedic surgery units. Compute total cost and average cost per patient for both the general surgery and the orthopedic surgery units.

3. Without providing computations, would the average cost of general surgery be higher or lower if all center costs were allocated based on the number of patients? Explain.

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Solution Summary

The solution explains how to allocate costs using cost drivers. Calculations are formatted in the attached Excel file.