PLEASE ANSWER EACH QUESTION

2. What are the allocations to each patient services department, and resulting profitability, under the four allocation methods using the base case cost amounts (exhibit 7.1) and allocation rates (exhibit 7.2)?

3. Consider the sensitivity of the results to changes in the values of the overhead cost pools. Repeat Question 2, but now use the overhead cost pool amounts from the first section of exhibit 7.3 along with the base case allocation percentages contained in exhibit 7.2. (Note that there are two different overhead cost pool amounts?Calculation 1 and Calculation 2.)

4. Consider the sensitivity of the results to changes in the allocation percentages. Repeat Question 2, but now use the percentages from exhibit 7.3 along with the base case overhead cost pool amounts given in exhibit 7.1.

5. Assess the sensitivity of patient services department profitability to the

a. Allocation method

b. Relative sizes of the overhead cost pools

c. Allocation rates

6. What does the analysis indicate about the true (but not really observable) profitability of each of the patient services departments?

7. What is your recommendation regarding the appropriate cost allocation method for the practice?

8. In your opinion, what are three key learning points from this case?

an? {acgv'fuwh Wham . EAG N FAMILY'x PRACTICE COST ALLOCATION METHODS EAGAN FAMILY PRACTICE is a medical practice with four locations in the MinneapolisSt. Paul areaThe clinical staff consists of 20 physiciansall of whom practice in one or more areas of family medicineand 46 advanced practice providers and nurses. Eagan is organized into three patient service departments: AdUIt MCdiCine, Obstetrics, and Pediatrics. Supporting these patient service departments are the Administration, Facilities, and Finance departments. Exhibit 7.1 shows Eagan's summary revenue and cost PYOjec tions by department for the coming year. As part of a muchneeded overhaul of the cost allocation process, Eagan conn'acted with a major accounting rm to estimate the amount of services provided by the support departments to each other and to each patient service department. The intent of the study was to provide data that would help Eagan develop a better cost allocation system to replace the outdated, arbitrary system currently in use. The results of this study are shown in exhibit 7.2. Although expressed as percentages of the total dollar amount of support provided to other departments (instead of the more typical cost allocation rates), the data in exhibit 7.2 are based on an extensive study using sound managerial accounting techniques. Thus, both senior management and department heads at Eagan are comfortable with the resulting allocation percentages. (Hint: To ensure that you apply the percentages properly in your analysis, pay attention to note 2 at the bottom of exhibit 7.2.) l The secondsth in the cost allocation processimprovement initiative is to choose. the allocation method. Four allocation methods are under consideration: direct, step-down, double apportionment, and reciprocal. Jerryilverrnan, Eagan's chief nancial ofcer, has asked Ashley Matson, Foundation of ACHE, 2022. Reproduction without permission is prohibited. 49 \f\f\f\f\f