18 Jun WHAT ARE THE APPROPRIATE ALLOCATION RATES?
St. Benedict’s Hospital has three support departments and four patient services departments.
The direct costs to each of the support departments are:
General Administration $2,000,000
Facilities 5,000,000
Financial Services 3,000,000
Selected data for the three support and four patient services departments are as follows:
Patient Space
Services (Square Housekeeping Salary
Department Revenue Feet) Labor Hours Dollars
Support:
General 10,000 2,000 $1,500,000
Administration
Facilities 20,000 5,000 3,000,000
Financial Services 15,000 3,000 2,000,000
Total 45,000 10,000 $6,500,000
Patient Services:
Routine Care $30,000,000 400,000 150,000 $12,000,000
Intensive Care 4,000,000 40,000 30,000 5,000,000
Diagnostic Services 6,000,000 60,000 15,000 6,000,000
Other Services 10,000,000 100,000 25,000 7,000,000
Total $50,000,000 600,000 220,000 $30,000,000
Grand total $50,000,000 645,000 230,000 $36,500,000
4.6 Assume that the hospital uses the direct method for cost allocation. Furthermore, the
cost driver for General Administration and Financial Services is patient services revenue,
while the cost driver for Facilities is space utilization.
a.What are the appropriate allocation rates?
b. Allocate the hospital’s overhead costs to the patient services departments.
4.7 Assume that the hospital uses salary dollars as the cost driver for General Administration,
housekeeping labor hours as the cost driver for Facilities, and patient services
revenue as the cost driver for Financial Services. (The majority of the costs of the Facilities
Department are devoted to housekeeping services.)
a.What are the appropriate allocation rates?
b. Allocate the hospital’s overhead costs to the patient services departments.
c. Compare the dollar allocations with those obtained in Problem 4.6. Explain the
differences.
d.Which of the two cost driver schemes is better? Explain your answer.
4.8 Now assume that $2million of Financial Services costs are related to billing andmanagerial
reporting and $1million are related to payroll and personnelmanagement activities.
a. Devise and implement a cost allocation scheme that recognizes that Financial Services
has two widely different functions.
b. Is there any additional information that would be useful in completing Part a?
c. What are the costs and benefits to St. Benedict’s of creating two cost pools for Financial
Services?
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