3:28 a instructure-uploads.s3.amazona C Gordon County Hospital (GCH) is a rural

Question

3:28 a instructure-uploads.s3.amazona C Gordon County Hospital (GCH) is a rural hospital. The financial statements for GCH are provided in Exhibit 1. The new CEO of the hospital is concerned that GCH does not have appropriate costing for management purposes. Accordingly she has discussed with the hospitalr's controller the current costing methodology. The controller has explained that the revenue centers are considered profit centers so that all direct costs of each revenue center are subtracted from revenues generated in primary patient care, labs and imaging. All of the support department costs are considered overhead and not currently allocated to any of the profit centers. The controller who began in the financial services area as an Accounts Receivable clerk and worked her way up the chain of command to controller indicates that the hospital is operating at a profit of about $12 million Furthermore she states that each of the profit centers are profitable. the primary patient care profit center has a $20 million proft followed closely by labs as can be seen through Exhibit 1 The CEO has asked the controller to allocate the overhead, or support service department cost, to each of the profit centers. Accordingly controller returns to her office and is contemplating how to allocate support Service department costs to each of the profit centers. She knows that you have recently completed an MBA and asked for your advice about how to allocate support service department costs You tell her that there are several methodologies that would be appropriate. You know that perhaps the simplest approach would be to use the direct method to allocate service department cost to each of the profit centers. She responds that she knows that the overhead cost allocation should follow some logical and systematic basis along the lines of what has caused the cost. She asked for your advice about what you believe would be the best method to allocate each service department cost. You reflect on the nature of each service department one by one. You know that financial services essentialy does all the billing and handling of insurance. Facilities you understand takes care of all of the maintenance of the hospital. Maintenance of equipment for specialized equipment is done by technicians who are specially contracted by each profit center and their costs are therefore considered direct to each profit center. The hospital employs housekeeping personnel that clean the hospital, wash laundry and so forth. Administration is responsible for overseeing the operations of the hospital. Personnel department is essentially a human resource department.

Explanation / Answer

Gordon County Hospital Support service department = Cost driver Financial services = should be based on No. of billing done for each of the profit center Facilities = Should be based on floor area occupied by each profit center House keeping = Should be based on floor area occupied by each profit center Administration = It can be either Billing done for or floor area area occupied by profit center Personnel = These costs can be directly allocated to No. of personnel employed by each profit center. & for personnel employed in general & administrative department, other reasonable basis like no. of patients handled by each profit center etc can be taken

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