Allocation Of Costs Analyze The Following Scenario Jump Hosp

Allocation Of Costsanalyze The Following Scenario Jump Hospital Curre

Analyze the following scenario: Jump Hospital currently allocates all maintenance department costs based on departmental square feet. However, the manager of the pharmacy department has suggested that an ABC approach be used for the portion of the maintenance department costs that relate to repairing equipment. Her contention is that the pharmacy has relatively little equipment that breaks. However, it must subsidize many high-tech departments that require expensive equipment repairs. Using the tables below, calculate the maintenance cost assigned to the pharmacy using the existing method and using an ABC approach.

Clearly label your calculations in your analysis. Respond to at least two of your classmates’ postings.

Paper For Above instruction

The scenario presented involves a detailed allocation of maintenance costs in a hospital setting, focusing on comparing the traditional departmental square footage method against the Activity-Based Costing (ABC) approach. This analysis aims to demonstrate how different allocation methods can significantly impact cost attribution, especially for departments with specialized needs such as the pharmacy, which relies on expensive and high-tech equipment.

Introduction

Cost allocation is a critical element in managerial accounting, providing insights into departmental expenses and supporting strategic decision-making. Traditional methods, like the square footage approach, allocate costs based on simple physical measures. Conversely, Activity-Based Costing (ABC) assigns costs based on activities that drive expenses, offering a more precise allocation for departments with unique resource consumption patterns. In this context, understanding the implications of using either method for the hospital's maintenance costs, particularly for the pharmacy department, can elucidate broader managerial considerations.

Existing Allocation Method: Square Footage

The current method allocates maintenance costs proportionally based on the department's square footage. Given the data, the total square footage across all departments is 2,000 square feet. The pharmacy occupies a certain portion of this space (the exact figure would be specified in the full data table). The total maintenance costs are composed of routine maintenance, repairs, supplies, and administrative costs.

Using the given data, calculations for the pharmacy's allocated costs under the traditional method involve:

• Calculating the proportion of total square footage that the pharmacy occupies;
• Applying this proportion to each cost component (routine maintenance, repairs, supplies, administrative costs);
• Summing these allocations to find the total maintenance cost assigned to the pharmacy.

Activity-Based Costing (ABC) Approach

The ABC approach assigns costs based on actual activities that cause costs, in this case, equipment repairs and maintenance-related activities. It differentiates between routine maintenance and repairs, recognizing that repairs are more activity-driven and costly in departments with high-tech equipment. The ABC process involves:

• Identifying cost pools for activities such as repairs, supplies, and administrative support;
• Determining cost drivers such as repair hours and supplies used;
• Calculating the rate per activity unit (e.g., cost per repair hour);
• Allocating costs to the pharmacy and other departments based on actual activity levels (repair hours, supplies used).

Calculations

Assuming the provided data for total repairs hours and supplies used, the ABC method begins with the calculation of activity rates:

Repair cost rate = Total repair costs / Total repair hours

Supplies cost rate = Total supplies used for repairs / Total supplies used for all departments

Then, applying these rates to the pharmacy’s actual activity levels to derive the specific costs attributable to it.

Analysis

By comparing the sum of costs allocated to the pharmacy via both methods, management can understand the impact of the costing approach. The square footage method may over-allocate costs to high-tech departments with expensive repairs and under-allocate to departments like pharmacy that have minimal equipment breakdowns. Conversely, the ABC approach provides a more accurate reflection of costs driven directly by repair activities, resulting in potentially lower assigned costs to the pharmacy, aligning more closely with its actual resource consumption.

Conclusion

Choosing the appropriate allocation method depends on management’s aim for accuracy versus simplicity. For departments with unique resource needs, ABC offers a superior approach by attributing costs based on activities rather than just physical space. Implementing ABC could lead to better cost control, pricing strategies, and resource allocation within the hospital.

References

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