Chapter 6 UNDERSTANDING HEALTHCARE FINANCIAL MANAGEMENT, 6th ed Problem 6.7 - Direct Cost Allocation Method St. Luke's Hospital has three support departments and four patient services departments. The direct costs to each of the support departments are as follows: Patient Services Departments Department Direct Support Department Costs Patient Services Revenue Space (square feet) Number of Full-Time Equivalent Employees Salary Dollars Allocation Rate Routine Care Intensive Care Obstetrics Services Other Services Total Support: General Administration $4,000,000 8,000 15 $2,500,000 Maintenance $5,000,000 10,000 75 3,500,000 Employee Benefit $4,000,000 7,000 50 3,000,000 Total $13,000,000 25,000 140 $9,000,000 Patient Services: Routine Care $ 40,000,000 500,000 700 $ 18,000,000 Intensive Care 7,000,000 45,000 200 6,000,000 Obstetrics Services 4,000,000 35,000 150 4,000,000 Other Services 12,000,000 200,000 400 8,000,000 Total $ 63,000,000 780,000 1,450 $ 36,000,000 Grand Total $ 63,000,000 805,000 1,590 $ 45,000,000 Assume that the hospital uses the direct method for cost allocation. Furthermore, the cost driver for general administration is patient services revenue, the cost driver for maintenance is space utilization, and the cost driver for employee benefits is the number of full-time equivalent employees. a. What are the appropriate allocation rates? General Administration $- per dollar of patient services revenue Maintenance $- per square foot Financial Services $- per full-time equivalent employees b. Allocate the hospital's overhead costs to the patient services departments.

Chapter 6 UNDERSTANDING HEALTHCARE FINANCIAL MANAGEMENT, 6th ed Problem 6.7 - Direct Cost Allocation Method St. Luke's Hospital has three support departments and four patient services departments. The direct costs to each of the support departments are as follows: Patient Services Departments Department Direct Support Department Costs Patient Services Revenue Space (square feet) Number of Full-Time Equivalent Employees Salary Dollars Allocation Rate Routine Care Intensive Care Obstetrics Services Other Services Total Support: General Administration $4,000,000 8,000 15 $2,500,000 Maintenance $5,000,000 10,000 75 3,500,000 Employee Benefit $4,000,000 7,000 50 3,000,000 Total $13,000,000 25,000 140 $9,000,000 Patient Services: Routine Care $40,000,000 500,000 700 $ 18,000,000 Intensive Care 7,000,000 45,000 200 6,000,000 Obstetrics Services 4,000,000 35,000 150 4,000,000 Other Services 12,000,000 200,000 400 8,000,000 Total $63,000,000 780,000 1,450 $ 36,000,000 Grand Total $63,000,000 805,000 1,590 $ 45,000,000 Assume that the hospital uses the Step-down method for cost allocation, with patient service revenue as the cost driver for general administration, space as the cost driver for Maintenance, and salary dollars as the cost driver for employee benefits. Assume also that the employee benefits department provides most services to other support departments, followed closely by general administration. The maintenance department provides the least services to the other support departments. . a. What are the appropriate allocation rates? Initial Allocation of EMPLOYEE BENEFIT Cost pool Cost Driver (salaries) Allocation Rate per dollar of salaries Allocation to GENERAL ADMINISTRATION Allocation to MAINTENANCE Subsequent Allocation of GENERAL ADMINISTRATION Cost pool Employee Benefit Allocation Total Cost Pool Cost Driver (patient service revenue) Allocation Rate per dollar of patient service revenue Allocation to MAITENANCE Subsequent Allocation of MAINTENANCE Cost pool Employee Benefit Allocation General Administration Allocation Total Cost Pool Cost Driver (space) Allocation Rate per square foot b. Allocate the hospital's overhead costs to the patient services departments.

Chapter 6 UNDERSTANDING HEALTHCARE FINANCIAL MANAGEMENT, 6th ed Problem 6.7 - Direct Cost Allocation Method St. Luke's Hospital has three support departments and four patient services departments. The direct costs to each of the support departments are as follows: Department Support: General Administration Maintenance Employee Benefit Total Direct Support Department Costs Patient Services Revenue Space (square feet) $ 4,000,000 $ 5,000,000 $ 4,000,000 $ 13,000,000 Number of Full-Time Equivalent Employees Allocation Salary Dollars Rate 8,000 10,000 7,000 25,000 15 75 50 140 $ 2,500,000 3,500,000 3,000,000 $ 9,000,000 Patient Services: Routine Care Intensive Care Obstetrics Services Other Services Total $40,000,000 7,000,000 4,000,000 12,000,000 $63,000,000 500,000 45,000 35,000 200,000 780,000 700 200 150 400 1,450 $18,000,000 6,000,000 4,000,000 8,000,000 $36,000,000 Grand Total $63,000,000 805,000 1,590 $45,000,000 Assume that the hospital uses the direct method for cost allocation. Furthermore, the cost driver for general administration is patient services revenue, the cost drive utilization, and the cost driver for employee benefits is the number of full-time equivalent employees. a. What are the appropriate allocation rates? General Administration Maintenance Financial Services $ $ $ - per dollar of patient services revenue per square foot per full-time equivalent employees b. Allocate the hospital's overhead costs to the patient services departments. CARE FINANCIAL MANAGEMENT, 6th ed hod e support departments are as follows: Patient Services Departments Routine Care Intensive Care Obstetrics Services Other Services tion is patient services revenue, the cost driver for maintenance is space Total Chapter 6 UNDERSTANDING HEALTHCARE FINANCIAL MANAGEMENT, 6th Problem 6.7 - Direct Cost Allocation Method St. Luke's Hospital has three support departments and four patient services departments. The direct costs to each of the support departments are as follows: Department Support: General Administration Maintenance Employee Benefit Total Direct Support Department Patient Services Costs Revenue $ 4,000,000 $ 5,000,000 $ 4,000,000 $ 13,000,000 Patient Services: Routine Care Intensive Care Obstetrics Services Other Services Total Grand Total Space (square feet) Number of Full-Time Equivalent Employees Allocation Salary Dollars Rate 8,000 10,000 7,000 25,000 15 75 50 140 $ 2,500,000 3,500,000 3,000,000 $ 9,000,000 $ 40,000,000 7,000,000 4,000,000 12,000,000 63,000,000 500,000 45,000 35,000 200,000 780,000 700 200 150 400 1,450 $18,000,000 6,000,000 4,000,000 8,000,000 $36,000,000 $ 63,000,000 805,000 1,590 $45,000,000 $ Assume that the hospital uses the Step-down method for cost allocation, with patient service revenue as the cost driver for general administration, space as the cost d dollars as the cost driver for employee benefits. Assume also that the employee benefits department provides most services to other support departments, followed cl maintenance department provides the least services to the other support departments. . a. What are the appropriate allocation rates? Initial Allocation of EMPLOYEE BENEFIT Cost pool Cost Driver (salaries) Allocation Rate per dollar of salaries Allocation to GENERAL ADMINISTRATION Allocation to MAINTENANCE Subsequent Allocation of GENERAL ADMINISTRATION Cost pool Employee Benefit Allocation Total Cost Pool Cost Driver (patient service revenue) Allocation Rate Allocation to MAITENANCE per dollar of patient service revenue Subsequent Allocation of MAINTENANCE Cost pool Employee Benefit Allocation General Administration Allocation Total Cost Pool Cost Driver (space) Allocation Rate per square foot b. Allocate the hospital's overhead costs to the patient services departments. ARE FINANCIAL MANAGEMENT, 6th ed od upport departments are as follows: Patient Services Departments Routine Care Intensive Care Obstetrics Services Other Services general administration, space as the cost driver for Maintenance, and salary to other support departments, followed closely by general administration. The Total