Question
Case study is from Buchbinder, S. B., Shanks, N. H., & Kite, B. J. (2021). Introduction to Health Care Management (4th ed.). Burlington, MA: Jones
Case study is from Buchbinder, S. B., Shanks, N. H., & Kite, B. J. (2021). Introduction to Health Care Management (4th ed.). Burlington, MA: Jones & Bartlett Learning
50,000 sq ft are dedicated to outpatient care and orthopedics. Outpatient portion of the hospital currently uses about 75% of the space for routine medical care and the other 25% used for orthopedic care.
I learned during a directors meeting with the CEO and CFO of the hospital I work at, that due to an increase in demand for routine care services, the orthopedics department I work in needs an additional 25% of space, that is 50,000 square feet x 25% or an additional 12,500 square feet. This additional space need would bring the total routine care space needs to 50,000 square feet, the entire current space allotted.
I determined:
Total Indirect Expenses Without Allocation-
- Routine Care - $307,500
- Orthopedics Care- $195,150
Total Indirect Expenses After Allocation- Revenue Method Allocation 1
Routine: $450,000
Ortho: $263,000
Total Indirect Expenses After Allocation - Square Foot Method Allocation 2
Routine: $476,000
Ortho: $238,000
Net Income For Each Department - Before Allocation
Routine Care- $86,500
Orthopedics - $1,850
Net Income For Each Department - After Allocation
Revenue Method Allocation
Routine Care - $129,500
Orthopaedics- $2,300
Square Foot Method Allocation
Routine Care- $104,000
Orthopaedics- $23,200
Do you think the cost allocation method of using revenue as a cost driver is a fair allocation method? Why or why not?
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