Case Part A 2 Next: Make The Allocation On The Basis Of The

Casepart A 2next Make The Allocation On The Basis Of The Following D

Make the allocation on the basis of the following data. Exhibit 3 shows data for square feet, housekeeping labor hours and salaries for each of the three production departments. First, calculate an allocation rate (show your work), then allocate costs and calculate profit (including direct costs) for each of the production departments. Cost drivers and total cost pool for each support department are listed below:

• Financial Services: Cost Pool = $1,500,000; Cost Driver = Patient Revenue = $80,000,000
• Facilities: Cost Pool = $3,800,000; Cost Driver = Square Feet = 300,600
• Housekeeping: Cost Pool = $1,600,000; Labor Hours = 91,000
• Administration: Cost Pool = $4,400,000; Salary Dollars = $10,183,000
• Personnel: Cost Pool = $2,550,000; Salary Dollars = $10,183,000

Prepare a schedule illustrating the allocation of support department costs to each of the production departments and calculate the total costs (allocated support department costs + direct costs) and the net income of each production department after all costs have been allocated. Read Appendix B to Chapter 12 before attempting this problem. Also see the video for this part of the case.

Paper For Above instruction

This paper focuses on the systematic allocation of support department costs within a hospital setting to accurately determine the profitability of different production or profit centers. It encompasses detailed calculations of allocation rates based on various cost drivers, the process of distributing support costs to core departments, and subsequent calculation of department-specific profits. The analysis provides insight into appropriate methods for overhead allocation, emphasizing the importance of choosing cost drivers that logically reflect the nature of each support service. By doing so, hospital management can make better-informed decisions about resource utilization and performance evaluation.

In a healthcare environment, accurately allocating support department costs is vital to understanding the true profitability of primary functions like patient care, laboratory services, and imaging. These underlying accounting practices impact budgeting, cost control, and strategic planning. The calculation begins with determining an allocation rate for each support department by dividing the total support costs by their respective cost drivers. For instance, for financial services, the rate is derived by dividing $1,500,000 by $80,000,000 in patient revenue, resulting in an overhead rate per dollar of revenue. Similarly, for facilities, the rate is computed by dividing $3,800,000 by total square footage, while housekeeping costs are allocated based on labor hours, and administration and personnel costs through salary dollars.

Once the rates are established, they are applied to the respective departments' utilization figures to determine support costs allocated to each of the primary profit centers. This process involves multiplying each department’s usage of a cost driver by the applicable rate. For example, if a department has $10 million in patient revenue, and the financial services rate is $0.01875 per dollar, then support costs allocated from financial services amount to approximately $187,500. Similar calculations are performed for all other support departments.

After allocating support costs, total costs for each profit center—including both direct and allocated overhead—are calculated. Subtracting these from revenues yields net income or profit metrics for each department, providing a clearer picture of their financial performance. This methodology ensures more precise cost attribution, aligning overhead expenses with the activities that cause them, and facilitates better managerial control and decision-making.

Moreover, selecting appropriate cost drivers is essential. For example, square footage may best reflect facilities costs, labor hours for housekeeping, and patient revenue for financial services. The rationale for these choices rests upon understanding what causes the support department’s expenses—maintenance needs for facilities, staffing levels for housekeeping, and billing activities for financial services. Trade-offs in complexity and accuracy are considered; a more refined allocation method might use activity-based costing if more detailed data were available, but the current approach offers a practical and systematic solution.

In conclusion, accurate overhead allocation in a hospital setting involves carefully selecting cost drivers that mirror the underlying causes of support costs. The calculated support costs, when allocated correctly, provide a more truthful depiction of departmental profitability, supporting strategic decisions related to resource distribution and performance management. Ultimately, the systematic approach enhances financial transparency and operational efficiency in healthcare management.

References

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