Community Recovery Clinic offers two types of services: inpatient and outpatient

Question

Community Recovery Clinic offers two types of services: inpatient and outpatient. They have two types of service departments: administration and housekeeping. Direct costs of nursing care and supplies can be traced directly to the patient.

                                                                                                                              Number of                      Square

                                                         Departments                                          Employees                   Footage

                                                                 Inpatient                                                           40                       20.000

                                                              Outpatient                                                           20                       10,000

                                                      Administration                                                           10                         5,000       

                                                       Housekeeping                                                              5                         5,000

Overhead costs for each department are as follows:

                                                      Administration              $500,000

                                                       Housekeeping              $200,000

Administration is allocated based on number of employees and housekeeping is based on square footage. Carry out calculations to four decimal places.

Required:

Allocate service department costs using the direct method.

Allocate service department costs using the reciprocal method.

What is the other method of allocation?

Briefly discuss the pros and cons of each method and select the best one.

Explanation / Answer

Direct Method Department Sum of percentage Inpatient Outpatient Administration 40+20=60 40/60 20/60 House keeping 20000+10000=30000 20000/30000 10000/30000 Department Inpatient Outpatient Administration House keeping Allocation Overhead                       500,000               200,000 Department Administration                        333,333                    166,667 -500000 House keeping                        133,333                      66,667 -200000 Total                        466,667                    233,333                                   -                             -   Reciprocal Method Inpatient Outpatient Administration House keeping Department Administration cost 57.14% 28.57% 14.29%Y House keeping Cost 57.14% 28.57% 14.29%Y Original Cost of Administration (X)                        500,000 Orginal Cost of House keeping (Y)                        200,000 After Getting the share Cost of Administration (X) 500000+0.1429Y Cost of House keeping (Y) 200000+0.1429X X= 500000+.1429(200000+0.1429X) X= 500000+28500+0.02042X X-0.02042X 528500 0.97958X 528500 X                    539,517 By putting the value of X in second Equation Y 200000+0.1429X Y 200000+0.1429*539517 Y                    277,097 Suppose that Administration Cost is X House keeping is Y Distrbution Summary Inpatient Outpatient Administration House keeping Original Cost                       500,000               200,000 Distrbution Department Administration cost                        308,280                    154,140                      -539,517                  77,097 House keeping Cost                        158,373                      79,207                          39,517              -277,097 Total Overhead                        466,653                    233,347                                   -                             -

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