Posted: July 14th, 2016

What are the appropriate allocation rates?

6.3
St. Benedict’s Hospital has three support departments and four patients services departments. The direct costs to each of the support departments are:
General Admin: $2,000,000
Facilities: $5,000,000
Financial Services: $3,000,000

Selected data for the three support and four patient services department are:

Assume that the hospital uses the direct method for cost allocation. Furthermore, the cost driver for general administration and financial services patient services revenue, while the cost driver for facilities is space utilization.
a. What are the appropriate allocation rates?
b. Use a allocation table similar to Exhibit 6.7 (below) to allocate the hospital’s overhead costs to the patient services departments.

Exhibit 6.7

6.4
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.