Posted: April 26th, 2016

# Which of the two cost driver schemes is better?

6.2
Refer to Problem 6.1. Assume that the three patient services departments are adult services, pediatric services, and other services. The patients services revenue and house of housekeeping services for departments are:

Department Revenue Housekeeping Hours
Adult Services 3,000,000 1500
Pediatric Services 1,500,000 3000
Other Services 500,000 500
Total 5,000,000 5000

a. What is the dollar allocation to each patient services department if patient services revenue is used as the cost driver?
b. What is the dollar allocation to each patient services department if hours of housekeeping support are used as the cost driver?
c. What is the difference in the allocation to each department between the two drivers?
d. Which of the two drivers is better? Why?

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.

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