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Kensington Hospital has three support departments (cost centers): General Administration, Facilities, and Financial Services, and four patient services departments (revenue centers): Routine, Intensive, Diagnostic and Other Services. The direct costs to each of the support departments are:

Support Department

Direct Cost

General Administration

$ 2,000,000

Facilities

$ 5,000,000

Financial Services

$ 3,000,000

There are several potential cost drivers for each department, such as patient service revenue, space utilization, housekeeping labor hours and salary dollars. The financial and operational data for the three support departments and four patient services departments:

Patient Service Revenue ($)

Space (sq-ft)

Housekeeping Labor Hours

Salary Dollars ($)

Support: (Cost Centers)

General Administration

10,000

2,000

1,500,000

Facilities

20,000

5,000

3,000,000

Financial

15,000

3,000

2,000,000

Total

45,000

10,000

6,500,000

Patient Services: (Revenue Centers)

Routine

30,000,000

400,000

150,000

12,000,000

Intensive

4,000,000

40,000

30,000

5,000,000

Diagnostic Services

6,000,000

60,000

15,000

6,000,000

Other Services

10,000,000

100,000

25,000

7,000,000

Total

50,000,000

600,000

220,000

30,000,000

Grand Total

50,000,000

645,000

230,000

36,500,000

1. Assume that the hospital uses the direct method for cost allocation. Furthermore, the cost driver for General Administration and Financial Services is patient services revenue ($), while the cost driver for Facilities is space utilization (sq-ft).

a. What are the appropriate allocation rates?

ANSWER: (Please show calculation details for partial points)

Cost Allocation Rate:

General Administration

?

per dollar of patient services revenue

Facilities

?

per sq-ft space

Financial Services

?

per dollar of patient services revenue

b. Allocate the hospital’s overhead costs to the patient services departments using the following table.

ANSWER:

Patient Services Department

Routine

Intensive

Diagnostic Services

Other Services

Total

General Administration

?

?

?

?

$2,000,000

Facilities

?

?

?

?

$5,000,000

Financial Services

?

?

?

?

$3,000,000

Total Indirect Costs

?

?

?

?

10,000,000

2. 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?

ANSWER: (Please show calculation details for partial points)

Cost Allocation Rate:

General Administration

?

per dollar of salary

Facilities

?

per housekeeping hour

Financial Services

?

per dollar of patient services revenue

b. Allocate the hospital’s overhead costs to the patient services departments using the following table.

ANSWER: (Please show calculation details for partial points)

Patient Services Department

Routine

Intensive

Diagnostic Services

Other Services

Total

General Administration

?

?

?

?

$2,000,000

Facilities

?

?

?

?

$5,000,000

Financial Services

?

?

?

?

$3,000,000

Total Indirect Costs

?

?

?

?

10,000,000

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Tod Thiel
Tod ThielLv2
28 Sep 2019

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