Chapter 6 Problem 6.3 Hospital Cost Allocation-Cost Driver Problem 6.4 Hospital

Question

Chapter 6 Problem 6.3 Hospital Cost Allocation-Cost Driver Problem 6.4 Hospital Cost Allocation Alternative Cost Drivers Essay Questions A Describe the primary attributes of a good cost driver B- In Problems 6.3 and 6.4 (St. Benedict's Hospital), the Financial Services Department was a single cost pool and the cost driver selected to allocate Financial Services Department cost was patient service revenue B1 -Is Patient Service Revenue a good or bad cost driver for Financial Services Department costs? Please explain why? C Assume that you are not limited to the cost pools or drivers provided for St Benedict's Hospital in Problems 6.3 and 6.4. What are your recommendation of how best to allocate the $2,000,000 of Financial Services Department costs to the patient service departments? .C1 -What, if anything would you do to the Financial Service Department cost pool? C2 - What cost driver(s), including cost driver(s) not listed in St. Benedict's, would you recommend to use to allocate Financial Services Department costs? Please explain why you have made your recommendation regarding the cost driver(s) D-What is the primary differences between the Direct Method of allocating overhead (Problem 6.3 and 6.4) and the Step-Down Method? D1 - Explain the primary difference D2 - Which method, Direct or Step-Down, is used most often by hospitals and why

Explanation / Answer

A. a good cost driver should provide the correct basis for allocating cost pools. It should display the right approach and clear understanding of the cost object. For example the cost driver for allocation of labor costs will be number of driect labor hours available multiplied with hourly rate. Cost driver for a facilities department will be amount of space used by each department. Selection of appropriate cost drivers is very significant for allocation of costs. A good cost driver should be fair and aim at uniform cost reduction throughout the organization.

B. Patient service revenue is a good cost driver for financial service department of a hospital. Financial service overheads can be classified in two categories:

i) Billing and collections cost pool

ii) Budgeting cost pool

Therefore for billing and collection overhead allocation, patient service revenue will serve as the ideal cost driver.

C. The allocation of financial services cost will be allocated between two sub departments of patient service revenue:

i) Routine care

ii) Critical care

This allocation will be based on number of patients in each department.

D. i) The direct method is less complex than step down method. In this method, costs of each support departments are allocated only to patient revenue service while step down method includes intrasupport department relationships.

ii) There's not much difference in overhead calculation when it comes to both methods. So as per situation and complexity either of the two methods is used by hospitals. When direct cost allocation does not make much sense and more in depth understanding of intra department figures are invloved then step down method is used.

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