Health-aware is a large medical practice in Sydney owned by Dr Palmer, a medical entrepreneur, and staffed by salaried doctors. Until recently the practice had been managed by Palmer’s son, Jason. However, Dr Palmer became concerned about his son’s financial management and appointed a qualified accountant. Graham Cooke. as practice manager. Cooke was amazed by the lack of information about the costs of the services provided for patients. He immediately implemented a service costing system that required the doctors to keep detailed records of the time they spent on each medical procedure. Each service cost included:
– Professional labour costs, based on the doctor’s time multiplied by the doctor’s average salary rate of $120 per hour.
– Practice overhead costs, based on a predetermined overhead rate of 400 per cent of professional labour costs.
The predetermined overhead rate was based on the budget for the next year and estimated using the following formula:
At a practice meeting. Cooke presented the following estimates of service costs and profits:
As each of these services required the same amount of time, Cooke recommended that the should focus on blood tests rather than on standard consultations or pregnancy tests.
1. Identify and explain the differences between Healthaware’s overhead rate and overhead rates used in manufacturing firms.
2. Discuss the costs and benefits of the service cost information provided by Cooke.
3. Do you agree with Cooke’s advice?