Chapter 6: Departmental Costing and Cost Allo 64 Assume that the hospital uses s

Question

Chapter 6: Departmental Costing and Cost Allo 64 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 stem from the provision of housekeeping services.) a. What are the appropriate allocation rates? b. Use an allocation table similar to the one used for Problem 6.3 to allocate the hospital's overhead costs to the patient services departments c. Compare the dollar allocations with those obtained in Problem 6.3. Explain the differences. d. Which of the two cost driver schemes is better? Explain your answer.

Explanation / Answer

6.3 .a. a. Appropriate allocation rates Routine care Intensive care Diagonistic care Other services Allocation Base General Administration 30/50 4/50 6/50 10/50 Patient services revenue Facilities 4/6 0.4/6 0.6/6 1/6 Space utilisation (sq.ft.) Financial Services 30/50 4/50 6/50 10/50 Patient services revenue 6.3 .b. Routine care Intensive care Diagonistic care Other services Total General Administration 1200000 160000 240000 400000 2000000 Facilities 3333333 333333.3 500000 833333.3 5000000 Financial Services 1800000 240000 360000 600000 3000000 Total 6333333 733333.3 1100000 1833333 10000000 6.4 a. a. Appropriate allocation rates Routine care Intensive care Diagonistic care Other services Allocation Base General Administration 12/30 5/30 6/30 7/30 Salary $ Facilities 1.5/2.2 0.3/2.2 0.15/2.2 0.25/2.2 House keeping Labor hrs. Financial Services 30/50 4/50 6/50 10/50 Patient services revenue 6.4. b. Routine care Intensive care Diagonistic care Other services Total General Administration 800000 333333.3 400000 466666.7 2000000 Facilities 3409091 681818.2 340909.09 568181.8 5000000 Financial Services 1800000 240000 360000 600000 3000000 Total 6009091 1255152 1100909.1 1634848 10000000 6.4. c. Routine care Intensive care Diagonistic care Other services Total As in 6.3 6333333 733333.3 1100000 1833333 10000000 As in 6.4 6009091 1255152 1100909.1 1634848 10000000 Difference 324242 -521818 -909 198485 0 6.4. d. Allocation as in 6.4 a. is better as it alloactes OH costs based on the activities performed & hence more accurate.

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