Question
Kensington Hospital has three support departments (cost centers): General Administration, Facilities, and Financial Services, and four patient services departments (revenue centers): Routine, Intensive, Diagnostic and
Kensington Hospital has three support departments (cost centers): General Administration, Facilities, and Financial Services, and four patient services departments (revenue centers): Routine, Intensive, Diagnostic and Other Services. The direct costs to each of the support departments are:
Support Department | Direct Cost |
General Administration | $ 2,000,000 |
Facilities | $ 5,000,000 |
Financial Services | $ 3,000,000 |
There are several potential cost drivers for each department, such as patient service revenue, space utilization, housekeeping labor hours and salary dollars. The financial and operational data for the three support departments and four patient services departments:
Patient Service Revenue ($) | Space (sq-ft) | Housekeeping Labor Hours | Salary Dollars ($) | |
Support: (Cost Centers) | ||||
General Administration | 10,000 | 2,000 | 1,500,000 | |
Facilities | 20,000 | 5,000 | 3,000,000 | |
Financial | 15,000 | 3,000 | 2,000,000 | |
Total | 45,000 | 10,000 | 6,500,000 | |
Patient Services: (Revenue Centers) | ||||
Routine | 30,000,000 | 400,000 | 150,000 | 12,000,000 |
Intensive | 4,000,000 | 40,000 | 30,000 | 5,000,000 |
Diagnostic Services | 6,000,000 | 60,000 | 15,000 | 6,000,000 |
Other Services | 10,000,000 | 100,000 | 25,000 | 7,000,000 |
Total | 50,000,000 | 600,000 | 220,000 | 30,000,000 |
Grand Total | 50,000,000 | 645,000 | 230,000 | 36,500,000 |
1. Assume that the hospital uses the direct method for cost allocation. Furthermore, the cost driver for General Administration and Financial Services is patient services revenue ($), while the cost driver for Facilities is space utilization (sq-ft).
a. What are the appropriate allocation rates?
ANSWER: (Please show calculation details for partial points)
Cost Allocation Rate: | ||
General Administration | ? | per dollar of patient services revenue |
Facilities | ? | per sq-ft space |
Financial Services | ? | per dollar of patient services revenue |
b. Allocate the hospitals overhead costs to the patient services departments using the following table.
ANSWER:
Patient Services Department | |||||
Routine | Intensive | Diagnostic Services | Other Services | Total | |
General Administration | ? | ? | ? | ? | $2,000,000 |
Facilities | ? | ? | ? | ? | $5,000,000 |
Financial Services | ? | ? | ? | ? | $3,000,000 |
Total Indirect Costs | ? | ? | ? | ? | 10,000,000 |
2. Assume that the hospital uses salary dollars as the cost driver for General Administration, housekeeping labor hours as the cost driver for Facilities, and patient services revenue as the cost driver for Financial Services. (The majority of the costs of the facilities department stem from the provision of housekeeping services.)
a. What are the appropriate allocation rates?
ANSWER: (Please show calculation details for partial points)
Cost Allocation Rate: | ||
General Administration | ? | per dollar of salary |
Facilities | ? | per housekeeping hour |
Financial Services | ? | per dollar of patient services revenue |
b. Allocate the hospitals overhead costs to the patient services departments using the following table.
ANSWER: (Please show calculation details for partial points)
Patient Services Department | |||||
Routine | Intensive | Diagnostic Services | Other Services | Total | |
General Administration | ? | ? | ? | ? | $2,000,000 |
Facilities | ? | ? | ? | ? | $5,000,000 |
Financial Services | ? | ? | ? | ? | $3,000,000 |
Total Indirect Costs | ? | ? | ? | ? | 10,000,000 |
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