Question
Overhead Cost Cost driver Driver units Appropriate allocations rates (1/2) General administration cost $2,000,000.00 Salary dollars $30,000,000.00 0.07 Financial service cost $5,000,000.00 Patient revenue service
| Overhead | Cost | Cost driver | Driver units | Appropriate allocations rates (1/2) |
| General administration cost | $2,000,000.00 | Salary dollars | $30,000,000.00 | 0.07 |
| Financial service cost | $5,000,000.00 | Patient revenue service | $50,000,000.00 | 0.1 |
| Facilities service cost | $3,000,000.00 | Housekeeping labor | $220,000.00 | 13.64 |
| Total | $10,000,000.00 |
| Support departments | Patient service department | ||||
| Routine care | Intensive care | Diagnostic service | Other services | Total | |
| Salary dollars | $12,000,000.00 | $5,000,000.00 | $6,000,000.00 | $7,000,000.00 | $30,000,000.00 |
| Patient revenue service | $30,000,000.00 | $4,000,000.00 | $6,000,000.00 | $10,000,000.00 | $50,000,000.00 |
| Housekeeping labor | $150,000.00 | $30,000.00 | $15,000.00 | $25,000.00 | $220,000.00 |
| General administrative cost ($0.004) | $800,000.00 | $333,333.00 | $400,000.00 | $466,667.00 | $2,000,000.00 |
| Financial service cost | $3,000,000.00 | $400,000.00 | $600,000.00 | $1,000,000.00 | $5,000,000.00 |
| Facilities service cost | $2,045,455.00 | $409,091.00 | $204,545.00 | $340,909.00 | $3,000,000.00 |
| Total overhead allocated | $5,845,455.00 | $1,142,424.00 | $1,204,545.00 | $1,807,576.00 | $10,000,000.00 |
| Overhead | 6.3 | 6.4 |
| Appropriate allocation rates | ||
| General administrative cost | 0.04 | 0.07 |
| Financial service cost | 0.1 | 0.1 |
| Facilities service cost | 5 | 13.64 |
Now assume that the hospital uses the step-down method for cost allocation, with 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. Assume also that the general administration department
provides the most services to other support departments, followed closely by the facilities department. The
financial services department provides the least services to the other support departments.
A. Use an allocation table to allocate the hospitals overhead costs to the patient services departments.
B. Compare the dollar allocations with those obtained in Problem 6.4. Explain the differences.
C. Is the direct method or the step-down method better for cost allocation within St. Benedicts?
Explain your answer.
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Accounting for Non-Accounting Students
Authors: John R. Dyson
8th Edition
273722972, 978-0273722977
