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 hospitalâs 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 hospitalâs 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
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 hospitalâs 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 hospitalâs 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 |
Related questions
Tacoma Hospital has three support departments and four patientservices departments. The direct costs to each of the supportdepartments are as follows:
Tacoma Hospital has three support departments and four patientservices departments. The direct costs to each of the supportdepartments are as follows:
Direct Costs | Cost Driver | |
General Administration | $2,000,000 | Salary Dollars |
Facilities | $5,000,000 | Housekeeping Labor Hours |
Financial Services | $3,000,000 | Patient Services Revenue |
Total | $10,000,000 |
The patient services revenue, salary dollars, and housekeepinglabor hours for each department are as follows:
Revenue | Salary Dollars | Housekeeping Labor Hours | |
General Administration | $1,500,000 | 2,000 | |
Facilities | $3,000,000 | 5,000 | |
Financial Services | $2,000,000 | 3,000 | |
Routine Care | $30,000,000 | $12,000,000 | 150,000 |
Intensive Care | $4,000,000 | $5,000,000 | 30,000 |
Diagnostic Services | $6,000,000 | $6,000,000 | 15,000 |
Other Services | $10,000,000 | $7,000,000 | 25,000 |
Assume that the hospital uses the step-down method for costallocation (see pages 230 0 232), with salary dollars as the costdriver for general administration, housekeeping labor hours as thecost driver for facilities, and patient services revenue as thecost driver for financial services. Assume also that the generaladministration department provides the most services to othersupport departments, followed closely by the facilities department.The financial services department provides the least services tothe other support departments.
a. Use an allocation table to allocate the hospitalâs overheadcosts to the patient services departments.
b. Is the direct method or the step-down method better for costallocation within Tacoma Hospitalâs? Please explain.
Tacoma Hospital has three support departments and four patientservices departments. The direct costs to each of the supportdepartments are as follows:
Direct Costs | Cost Driver | |
General Administration | $2,000,000 | Patient Services Revenue |
Facilities | $5,000,000 | Space (square feet) |
Financial Services | $3,000,000 | Patient Services Revenue |
Total | $10,000,000 |
The patient services revenue and space utilization (square feet)for each department are as follows:
Patient Services Revenue | Space (square feet) | |
Routine Care | $30,000,000 | 400,000 |
Intensive Care | $4,000,000 | 40,000 |
Diagnostic Services | $6,000,000 | 60,000 |
Other Services | $10,000,000 | 100,000 |
Total | $50,000,000 | 600,000 |
Assume that the hospital uses the direct method for costallocation. Furthermore, the cost driver for general administrationand financial services is patient services revenue, while the costdriver for facilities is space utilization.
a. Use an allocation table similar to Exhibit 6.7 to allocatethe hospitalâs overhead costs to the patient servicesdepartments.
