Community Recovery Clinic offers two types of services: inpatient and outpatient
ID: 2478652 • Letter: C
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:
1. Allocate service department costs using the direct method.
2. Allocate service department costs using the reciprocal method.
3. What is the other method of allocation?
4. Briefly discuss the pros and cons of each method and select the best one.
Explanation / Answer
Direct Method Administration Housekeeping Inpatient Outpatent Total Cost 500000 200000 Administration cost on the basis of emloyees 40 20 60 Allocation of administration cost 4:2 333333.333 166666.667 Housekeeping on the basis of sq. footage 20000 10000 30000 Allocation Of housekeeping cost 2:1 133333.3333 66666.66667 Total cost allocated 466666.667 233333.333 In direct cost it is directly allocated to inpatient and outpatient in the allocationg ratio Administration Housekeeping Inpatient Outpatent Total Administration cost on the basis of emloyees 5 40 20 65 Allocation of administration cost 7.6923 61.5385 30.7692 % 5/65*100 40/65*100 20/65*100 Housekeeping on the basis of sq. footage 5000 20000 10000 35000 Allocation Of housekeeping cost 14.2857 57.1429 28.5714 % Cost befor allocation 500000 200000 0 0 700000 Allocate administration Cost -500000 38461.5385 307692.3077 153846.1538 Total 238461.5385 Allocated housekeeping cost 34065.9341 -238461.5385 136263.7363 68131.8681 Allocate administration Cost -34065.9341 2620.4565 20963.6517 10481.8259 Allocated housekeeping cost 374.3509238 -2620.4565 1497.4037 748.7018 Allocate administration Cost -374.3509 28.7962 230.3698 115.1849 Allocated housekeeping cost 4.11 -28.7962 16.4550 8.2275 Allocate administration Cost -4.1137 0.3164 2.5315 1.2658 Allocated housekeeping cost 0.05 -0.3164 0.1808 0.0904 Total cost divided 0 0 466667 233333 700000 In reciprocal method is to keep allocating the two service department until the service department becomes 0 Ans 3 Step down method Under this the cost of that support department is taken first which is highest it is allocated to other departments Than after trhis allocation the cost of total other service department (housekeeping is allocated among inpatient and outpatient Administration Housekeeping Inpatient Outpatent Total Cost 500000 200000 Administration cost on the basis of emloyees 5 40 20 65 Allocation of administration cost 5:40:20 38461.53846 307692.308 153846.154 500000 Cost after allocation -500000 238461.5385 Housekeeping on the basis of sq. footage 20000 10000 30000 Allocation Of housekeeping cost 2:1 158974.359 79487.17949 238461.5 Total cost allocated -238461.5385 466666.667 233333.333 0 0 466666.667 233333.333 Ans 4 Pros and cons of direct method It is easy to calculculate and it is easily understanable by managers It ignoners interatction among support departments Pros and cons of Step down method It is comparitively easy to compute than reciprocal method It provides ranking to support departments thereby the most costly is allocated first so it is more logical than direct Method There is some interatiction aamong support departments Reciprocal method It is diffiicult to compute and not easily understandable by managers But it is the most accurate because it incorporates all the interaction between support departments. It is best allocation method Reciprocal method is best
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