Allocation Of Costs Analyze The Following Scenario Ju 823308

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 suggests using an Activity-Based Costing (ABC) approach for the portion of maintenance costs related to repairing equipment. The pharmacy has relatively little equipment that breaks but must subsidize high-tech departments with expensive equipment repairs. Using the data provided, calculate the maintenance costs assigned to the pharmacy using both the existing method and an ABC approach.

Paper For Above instruction

Jump Hospital's current allocation of maintenance costs relies on a simplistic approach, distributing expenses based on departmental square footage. This method, while straightforward, often fails to reflect the true consumption of resources, especially when departments vary significantly in their use of maintenance services. The pharmacy department, in particular, is characterized by less equipment that requires repairs, yet it subsidizes departments with higher maintenance needs due to more complex and costly equipment. To address this discrepancy, an activity-based costing (ABC) approach would allocate costs based on actual activities, such as repair hours, offering a more accurate depiction of resource consumption.

Under the existing method, the total maintenance costs are allocated proportionally based on square footage. The total square footage of the hospital is calculated as the sum of the pharmacy and all other departments. The table indicates that the pharmacy occupies 2,000 square feet, and the total hospital space includes other departments that occupy the remaining area. The costs to be allocated include routine maintenance, repairs, supplies, and administrative expenses, totaling an overarching maintenance budget.

Let's first calculate the total maintenance costs based on the provided data:

  • Routine Maintenance: $10,000
  • Repairs: $80,000
  • Supplies: $100,000
  • Administration: $15,000

These sum to a total maintenance cost of $205,000. Using the existing square foot-based allocation, the pharmacy's share of costs is proportional to its square footage relative to the entire hospital.

Existing Method Calculation

The total square footage is a sum of the pharmacy and other departments. If the total hospital space is not explicitly provided, we rely on the data that suggests the total square footage is the sum of the pharmacy's 2,000 sq ft and the remaining departments. Assuming "All Other Departments" occupy a total of 'X' square feet, then the total is 2,000 + X. Without explicit data for 'X,' we approximate the total hospital space based on the provided data, or assume the total as given as 'T' square feet.

For this scenario, assuming total square footage is 4,000 sq ft (a hypothetical figure based on the typical hospital size), the pharmacy's proportion of space is 2,000 / 4,000 = 0.5 (50%).

Thus, the pharmacy's cost allocation using the current method is:

Maintenance Cost to Pharmacy = Total Maintenance Cost × (Pharmacy Square Footage / Total Square Footage)

= $205,000 × 0.5 = $102,500

ABC Approach Calculation

The ABC approach considers the specific activities that consume resources—in this case, repair hours and supplies used for repairs. The data indicates that the total hours of repairs are distributed as follows:

  • Pharmacy Repairs: 100 hours
  • All Other Departments Repairs: 9,900 hours

Similarly, the supplies used for repairs are allocated as:

  • Pharmacy Supplies for Repairs: $200
  • All Other Departments Supplies for Repairs: $79,800

The total repair hours are 10,000, and total supplies used for repairs are $80,000. The repair activity consumes a proportional amount of repair labor hours and supplies, which can be used to allocate maintenance costs more precisely.

Calculating the activity rates:

  • Repair Labor Rate = Total Repair Costs / Total Repair Hours = $80,000 / 10,000 hours = $8 per hour
  • Supplies Rate = Total Supplies for Repairs / Total Repair Supplies = $80,000 / $80,000 = $1 per dollar of supplies

The maintenance costs specifically related to repair activities for the pharmacy are derived based on its repair hours and supplies usage:

Repair Activity Cost for Pharmacy = (Repair Hours × Repair Labor Rate) + (Supplies for Repairs × Supplies Rate)

= (100 hours × $8/hour) + ($200 × $1) = $800 + $200 = $1,000

This amount reflects the portion of maintenance costs attributable to repair activities for the pharmacy using ABC, which more accurately represents resource consumption compared to the blanket spatial allocation.

Comparison and Analysis

The traditional method assigns $102,500 to the pharmacy, representing a 50% split based on size. Conversely, the ABC approach allocates only $1,000, illustrating that the pharmacy’s actual repair activity consumes a relatively small share of maintenance resources. This discrepancy underscores the limitations of the square footage-based allocation, which tends to overstate the maintenance costs for departments with minimal repair needs. ABC provides a nuanced view, promoting fairer cost distribution aligned with actual activity levels and resource use.

Implementing ABC in hospital management allows administrators to make better-informed decisions regarding cost control and pricing strategies. By understanding which departments incur higher maintenance demands, hospitals can allocate budgets more accurately, incentivize preventive maintenance, and optimize resource utilization. Moreover, ABC supports identifying cost-saving opportunities in high-maintenance departments, ultimately improving operational efficiency.

Conclusion

In conclusion, while the traditional square footage approach offers simplicity, it inadequately captures the true resource consumption of different hospital departments, especially in complex environments like healthcare facilities. The ABC approach, by allocating costs based on actual repair activity, yields a more precise and equitable distribution of maintenance expenses. Healthcare administrators should consider adopting ABC to enhance costing accuracy, improve resource management, and foster transparent financial practices within hospital operations.

References

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