Assignment Exercise 61: Allocating Indirect Costs Study Tabl

Assignment Exercise 61 Allocating Indirect Costsstudy Table 61 Exa

Review the chapter text describing how indirect costs are allocated and complete the exercise by calculating the costs allocated to specified cost centers using the new allocation bases: volumes, direct costs, and number of films. Enter your calculations into a worksheet that replicates the setup in Table 6–2, and then total the new results.

Specifically, the new allocation bases are: (A) Volumes: 120, 130, 70, 110, 70, 500; (B) Direct costs: $1,100; $700; $1,300; $1,600; $1,300; $6,000; (C) Number of films: 17, 400, 20, 55, 25, 20, 520. Using these, compute the indirect costs allocated to cost centers #557, 558, 559, 560, and 561.

Once completed, total the new results to reflect the allocated indirect costs based on these new bases.

Paper For Above instruction

In managerial accounting, accurately allocating indirect costs to cost centers is essential for determining product or service profitability, controlling expenses, and making informed decision-making. Indirect costs, often called overhead costs, are expenses that cannot be traced directly to a specific cost object, such as a product or department, but are necessary for overall operations. The process of allocating these costs involves selecting appropriate bases or cost drivers that proportionally distribute costs across various departments or products. This paper explores the methodology of allocating indirect costs to radiology departments based on new allocation bases—volumes, direct costs, and number of films—and demonstrates how these bases influence cost distribution.

Traditional allocation methods often rely on volume-based measures such as patient throughput or service hours, direct costs, or specific activity measures like the number of films in radiology. The choice of allocation base significantly impacts cost accuracy and fairness. For instance, allocating costs based on volume assumes that higher patient volumes incur higher indirect costs, while using direct costs assumes a proportional relationship between direct expenses and overhead. Similarly, using the number of films as the basis directly relates to radiology activities, potentially providing a more accurate reflection of resource consumption.

In practice, the allocation process involves establishing a worksheet that captures the total indirect costs and the bases used for individual departments. For the radiology departments, this means calculating the proportion of each department's activity relative to the chosen base, then assigning costs accordingly. For example, if department #557 has a volume of 120 units, while the total volume across all departments is 500, then it would be allocated a proportion of indirect costs based on this ratio. This method applies similarly for direct costs and number of films.

The implications of using different bases become apparent when examining the results. A volume-based allocation might favor departments with higher patient counts, while a direct cost basis could skew the costs towards departments with high operating expenses. The number of films is a specific measure related to radiology activity and could offer a more activity-based perspective, aligning costs more closely with the actual use of radiological resources.

Calculating the allocated costs under each basis requires meticulous data entry and computation. Once the allocations are completed, totals can be compared to evaluate the impact of the allocation method. This comparison informs managers and accountants about how cost distribution shifts with different bases, highlighting areas where cost control or efficiency improvements are needed.

In conclusion, selecting an appropriate basis for allocating indirect costs is critical for fair and accurate cost management. Whether based on volumes, direct costs, or specific activity measures like the number of films, each method has advantages and limitations. The decision on which basis to use depends on the nature of the costs, the structure of the services, and the specific objectives of the cost analysis. Proper application of these methods ensures better transparency, accountability, and strategic decision-making in healthcare cost management.

References

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