The following data pertain to problems 6.3 through 6.6: St. Benedict\'s Hospital
ID: 2610788 • Letter: T
Question
The following data pertain to problems 6.3 through 6.6: St. Benedict's Hospital has three support departments and four departments. The direct costs to each of the support departments are as foll General Administration Facilities Financial Services $2,000,000 5,000,000 3,000,000 Selected data for the three support and four patient services departments a shown below: Patient Space Services (square Housekeeping Salary Revenue feet) LaborHours-Dollars Department Support General 10,000 2,000 1,500,000 Administration Facilities Financial Services 20,000 15,000 45,000 5,000 3,000,000 3,000 2,000,000 10,000S 6,500,000 Total Patient Services: Routine Care Intensive Care $30,000,000 400,000150,000 $12,000,000 30,000 5,000,00 6,000,000 7,000,000 $50,000,000 600,000220,000 $30,000,000 S50,000,000 645,000 230,000 $36,500,000 4,000,000 40,000 Diagnostic Services 6,000,000 60,000 15,000 25,000 Other Services 10,000,000 100,000 Total Grand Total 6.3 Assume that the hospital uses the direct method for cost allocation. financial Furthermore, the cost driver for general administration and services is patient services revenue, while the cost driver for facilities space utilization. is a. What are the appropriate allocation rates? b. Use an allocation table similar to Exhibit 6.7 to allocate the hospital's overhead costs to the patient services departments.Explanation / Answer
Answer to 6.3.a:
It has been clearly said that the cost for general administration and financial services is patient service revenue and the cost driver for facilities is space utilization accordingly, the appropriate allocation rates for the expenditures of three supporting departments in the four patient service departments have been calculated below:
The expenditures of General Administration and Financial Services shall be allocated in the four patient service departments in the following rates:
Patient service departments
Patient service revenue
Allocation rates
Allocation rates in %
Routine care
30000000
0.6
60
Intensive care
4000000
0.08
8
Diagnostic services
6000000
0.12
12
Other services
10000000
0.2
20
50000000
The expenditures of facilities shall be allocated in the four patient service departments in the following rates:
Patient service departments
Space (Square meter)
Allocation rates
Allocation rates in %
Routine care
400000
0.666667
66.66667
Intensive care
40000
0.066667
6.666667
Diagnostic services
60000
0.1
10
Other services
100000
0.166667
16.66667
600000
Answer to 6.4.b:
The expenditures, both direct and indirect expenditures, of three support departments have been allocated to the four specific patient service departments in the above allocation rates. The table below shows the allocation of the overall expenditures of the support departments in the four patient service departments.
Total cost
Basis
Appropriate allocation rate
Routine care
Intensive care
Diagnostic services
Other services
General administration
3500000
Patient service revenue
(30:4:6:10)
2100000
280000
420000
700000
3500000
Financial services
5000000
Patient service revenue
(30:4:6:10)
3000000
400000
600000
1000000
5000000
Facilities
8000000
Space utilization
(40:4:6:10)
5333333
533333.3
800000
1333333
8000000
Answer to 6.4.a:
Appropriate allocation rates have been calculated below for the expenditures of three supporting departments.
General administration department
Patient service departments
Salary ($)
Allocation rates
Allocation rates in %
Routine care
12000000
0.4
40
Intensive care
5000000
0.166667
16.66667
Diagnostic services
6000000
0.2
20
Other services
7000000
0.233333
23.33333
30000000
Facilities
Patient service departments
Housekeeping labour hours
Allocation rates
Allocation rates in %
Routine care
150000
0.681818
68.18182
Intensive care
30000
0.136364
13.63636
Diagnostic services
15000
0.068182
6.818182
Other services
25000
0.113636
11.36364
220000
Financial services
Patient service departments
Patient service revenue
Allocation rates
Allocation rates in %
Routine care
30000000
0.6
60
Intensive care
4000000
0.08
8
Diagnostic services
6000000
0.12
12
Other services
10000000
0.2
20
50000000
Answer to 6.4.b:
Allocation table containing the allocation of expenditures of supporting departments is provided below:
Total cost
Basis
Appropriate allocation rate
Routine care
Intensive care
Diagnostic services
Other services
General administration
3500000
Salary ($)
Table above
1400000
583333.3
700000
816666.7
3500000
Financial services
5000000
Patient service revenue
Table above
3000000
400000
600000
1000000
5000000
Facilities
8000000
Housekeeping labour hours
Table above
5454545
1090909
545454.5
909090.9
8000000
Answer to 6.4.c:
The table below shows the comparison between the allocations of overhead expenditures in four patient service departments:
General administration
Financial services
Facilities
Comparison
Allocation as per 6.3
Allocation as per 6.4
Allocation as per 6.3
Allocation as per 6.4
Allocation as per 6.3
Allocation as per 6.4
Routine care
2100000
1400000
3000000
3000000
5333333
5454545
Intensive care
280000
583333.3
3000000
400000
533333.3
1090909
Diagnostic services
420000
700000
600000
600000
800000
545454.5
Other services
700000
816666.7
1000000
1000000
1333333
909090.9
The differences and explanations are provided below:
General administration
Comparison
Allocation as per 6.3
Allocation as per 6.4
Differences (6.3 - 6.4)
Routine care
2100000
1400000
700000
Intensive care
280000
583333.3
-303333
Diagnostic services
420000
700000
-280000
Other services
700000
816666.7
-116667
As can be seen that the expenditures of General Administration department if apportioned using the salary as the cost driver between the four patient service departments then the due to relatively less quantum of salary paid by in the Routine care department the quantum of overhead cost of General department will be relatively less. The lower quantum of general department expenditures in the Routine care department will be made up by the excess appropriation in the other three patient service departments of the Hospital as the amount of salary paid by the other three departments are relative higher than the quantum of patient service revenue received by these departments.
Financial services
Comparison
Allocation as per 6.3
Allocation as per 6.4
Differences (6.3 - 6.4)
Routine care
3000000
3000000
0
Intensive care
400000
400000
0
Diagnostic services
600000
600000
0
Other services
1000000
1000000
0
Since the cost drover has not changed hence, there is no change in allocation of the overhead of financial services between the four patient service departments.
Facilities
Comparison
Allocation as per 6.3
Allocation as per 6.4
Differences (6.3 - 6.4)
Routine care
5333333
5454545
-121212
Intensive care
533333.3
1090909
-557576
Diagnostic services
800000
545454.5
254545.5
Other services
1333333
909090.9
424242.4
Again the reason for the above differences is the change in cost driver which have been used to apportion the overheads of facilities between the four service departments.
Answer to 6.4.d:
The allocation of overheads of three supporting departments which have been followed in the later part, i.e. in 6.4 is better compare to the allocation basis used under 6.3. The reason for this conclusion is that in the former case, i.e. in 6.3, the allocation of overheads of General Administration and Financial Services were apportioned using a general cost driver, i.e. patient service revenue. The overheads of Facilities however, were apportioned using space utilization as the cost driver. Compare to that utilization of salary as the cost driver to apportion the overheads of General Administration, patient service revenue as the cost driver to apportion overheads of Financial Services and house-keeping labour hours as the cost driver to apportion the overheads of Facilities are scientifically correct as these are more specific to the operations of different supporting departments.
Patient service departments
Patient service revenue
Allocation rates
Allocation rates in %
Routine care
30000000
0.6
60
Intensive care
4000000
0.08
8
Diagnostic services
6000000
0.12
12
Other services
10000000
0.2
20
50000000
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.