Housekeeping had 1000,00 in direct costs during 2007. These costs must be alloca

Question

Housekeeping had 1000,00 in direct costs during 2007. These costs must be allocatedto 3 revenue-producing depts using the direct method. 2 cost drivers are under considerationservices revenue and hours of housekeeping services used. The revenue service dept generated  $5million  in total revenues during 2007, to support these activities they used 5,000 hours of housekeeping services.

a. What is the value of the cost pool?

b. What allocation rate if: services revenue is used as the cost driver?

                                  : hours of housekeeping services is used as the cost driver?

Explanation / Answer

1 What is the value of the cost pool?
A cost pool consists of all the direct costs of one support department. In this case, the House keeping department of Ruger Clinic had $100,000 as total budgeted costs for the year 2007.
Hence cost pool = $100,000.

2 a What is the allocation rate if patient services revenue is used as the cost driver?
Cost drivers are to possess two important characteristics, fairness and cost control. To identify the allocation rate, first the cost pool must be established and then the best cost driver must be identified. In this case, cost pool is the total costs of the house keeping department which is $100,000. The patient services revenue was given to be $5,000,000.
Hence, Allocation rate = cost pool/ patient services revenue
= 100,000/ 5,000,000
= 0.02 for each dollar of patient services revenue.

2 b What is the allocation rate if hours of housekeeping services department is used as the cost driver?
Allocation rate = cost pool/ hours of housekeeping department
= 100,000/ 5000
= $20 per hour of services provided.

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