St. Benedict's hospital has 3 support departments and 4 patient services departments. The direct costs to each of the support departments are as follows:

General administration $2,000,000

Facilities 5,000,000

Financial services 3,000,000

Selected data for the 3 support and 4 patient services departments are shown below:

Department:	Patient services revenue	Space (square feet)	Housekeeping labor hours	Salary dollars
Support:
General administration		10,000	2,000	$1,500,000
Facilities		20,000	5,000	3,000,000
Financial Services		15,000	3,000	2,000,000
TOTAL		45,000	10,000	6,500,000
Patient Services:
Routine Care	30,000,000	400,000	150,000	12,000,000
Intensive care	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

PART 1

Assume that the hospital uses the direct method for cost allocation. Furthermore, the cost driver for general administration and fiancial servies is patient services revenue, while the cost driver for facilites is space utilization.

a. what are the apporpriate allocation rates?

b. Use an allocation table to allocate the hospital's overhead costs to the patient services department.

PART 2

Assume that the hospital uses salary dollars as the cost driver for general administration, housekeeping laborhours as the cost driver for facilities, and patient services revenue as the cost driver for fianacial services.

a. what are the appropriate allocation rates?

b. Use an allocation table to allocate the hospital;s overhead costs to the patient services department.

c. Compare with the dollar allocations from those obtained in Part 1.

d. which of the 2 cost driver schemes is better. explain?

PART 3

Now assume the hospital uses a 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 administation department provides the most services to other support departments, followed closely by the facilities department. The fianncial services department provides the least services to other support departments.

a. Use an allocation table to allocate the hospitals overhead costs to the patient services department.

b. compare the dollar allocations with those obtained in part 2. explain the differences.

c. Is the direct method or step-down method better for cost allocation within St.Benedicts? Explain.

PART 4

Return to the direct method of cost allocation and use the same cost drivers specified in Part 2 for the general administration and facilities department. However, assume that $2,000,000 of financial services cost is realted to billing and managerial reporting and $1,000,000 is related to payroll and personnel management activities.

a. Devise and implement a cost allocation scheme that recognizes that fianncial services department has 2 widely diffeent functions.

b. Is there any additional information that would be useful in completing part a of this problem?

c. What are the costs and benefits to St.Benedicts of creating 2 cost pools for the allocation of finacai lservices costs?