Cost Allocation. Use the information in Exhibit 12–12 to answer these questions.

a. David Paul, the new administrator for the surgical clinic, was trying to figure out how to allocate his indirect expenses. He decided to try to allocate utilities based on square footage of each department, to allocate administration based on direct costs, and to allocate laboratory based on tests. How would indirect costs be distributed as a result?

b. Nick Zeeman, the Director of Labs, was given approval to add 250 square feet of space to the lab by expanding into the Day-Op Suite, which lost the space. What will his new fully allocated expenses be?

(Assume there are no new additional costs incurred by adding the 250 square feet.)

c. Callie Zev, the Manager of the endoscopy suite, was concerned about adding more space to cystoscopy. She contends that if the two units were combined, fewer staff would be needed and direct costs could be reduced by $40,000 ($20,000 in each unit). She also feels that the Day-Op area is underutilized, and that 200 square feet could be used by a combined unit when excess capacity was needed. Assuming the 200 square feet were to be allocated equally between the endoscopy suite and cystoscopy, what would the total allocated costs for each of these two services be under this scenario?

Transcribed Image Text:

Exhibit 12-12 Basic Statistics for Cost Allocation in Surgery Clinic B Utilities Administration Laboratory Day-op Suite Cystoscopy Endoscopy Total Sq. Feet Direct Costs Lab Tests $100,000 1,500 $400,000 3,000 $725,000 4,500 $1,200,000 4,000 2,500 $400,000 500 3,000 $350,000 500 14,500 $3,175,000 5,000