Housekeeping Services Department Of Ruger Clinic, A Multi ✓ Solved
The housekeeping services department of Ruger Clinic, a multi
The housekeeping services department of Ruger Clinic, a multi-specialty practice in Toledo, Ohio had $100,000 in direct costs during 2015. These costs must be allocated to Ruger's three revenue-producing patient services departments, using the direct method. Two cost drivers are under consideration: patient services revenue and hours of housekeeping services used. The patient services departments generated $5 million in total revenues during 2015 and to support these clinical activities, they used 5,000 hours of housekeeping services.
Required: a. What is the value of the cost pool? b. What is the allocation rate if: (i) Patient services revenue is used as the cost driver (ii) Hours of housekeeping services is used as the cost driver c. Assume that the three patient services departments are adult services, pediatric services and other services. The patient services revenue and hours of housekeeping services for each department are as follows: Department Revenue Housekeeping Hours Adult Services $3,000, Pediatric Services 1,500,000 Other Services 500 Total $5,000,000 d. What is the dollar allocation to each patient services department, if patient services revenue is used as the cost driver? e. What is the dollar allocation to each patient services department, if hours of housekeeping support are used as the cost driver? f. What is the difference in the allocation to each department between the two drivers? g. Which of the two drivers is better? Why? 2. Analyze the financial statement for Overlay Hospital Attached. Calculate the financial ratios and write an essay on the following: What recommendations do you have for the future? Things that the organization should focus on improving (financially)? Management recommendations based financial performance of the company (analysis of financial ratios)? Conclusion Briefly describe the findings of each section.
Paper For Above Instructions
The housekeeping services department of Ruger Clinic encompasses a critical financial aspect in the allocation of costs to revenue-generating departments. The total direct costs incurred by this department during 2015 reach $100,000. Our objective includes determining the value of the cost pool, assessing allocation rates through different cost drivers, allocating costs to specific patient service departments, analyzing differences in allocations, and eventually deciding on the more effective driver.
Cost Pool Value Calculation
A fundamental step is to establish the cost pool value, which consists predominantly of all direct costs associated with the housekeeping services. Here, the cost pool value stands at $100,000 as this is the specified total spent on direct costs within the given period. It is vital to maintain this value as a baseline for allocation per service department.
Allocation Rate Determination
Next, we proceed to determine the allocation rates based on the selected cost drivers. Two potential cost drivers under consideration are the total patient services revenue and the hours of housekeeping services utilized by each department.
1. Using Patient Services Revenue as the Cost Driver: To establish this allocation rate, we calculate the ratio of direct costs to total patient revenue:
Allocation Rate (Revenue) = Total Direct Costs / Total Revenue = $100,000 / $5,000,000 = 0.02 (or 2%).
2. Using Hours of Housekeeping Services as the Cost Driver: The allocation rate is determined by the total hours of services used:
Allocation Rate (Hours) = Total Direct Costs / Total Hours of Service = $100,000 / 5,000 hours = $20 per hour.
Departmental Revenue and Housekeeping Hours
Next, we analyze the distribution of patient services revenue and the total hours of housekeeping utilized for each specific department:
| Department | Revenue | Housekeeping Hours |
|---|---|---|
| Adult Services | $3,000 | Required Hours TBD |
| Pediatric Services | $1,500,000 | Required Hours TBD |
| Other Services | $500 | Required Hours TBD |
Dollar Allocation to Each Department
1. Using Patient Services Revenue as the Allocation Base:
The dollar allocation to each department is based on the percentage of total revenue generated:
- Adult Services: 2% of $3,000 = $60
- Pediatric Services: 2% of $1,500,000 = $30,000
- Other Services: 2% of $500 = $10
2. Using Hours of Housekeeping Services as the Allocation Base: With 5,000 hours equivalent to a $20/h rate:
- Adult Services: Allocated Hours TBD x $20
- Pediatric Services: Allocated Hours TBD x $20
- Other Services: Allocated Hours TBD x $20
Differences in Allocations Between the Two Drivers
The variance in allocation results stems from the method applied to distribute the $100,000 in costs. This effect can significantly influence budgeting and departmental financial management.
Evaluating Cost Drivers
When determining the better cost driver, both methods present unique advantages. While revenue reflects department performance, housekeeping hours convey direct resource expenditure. The decision on the superior driver hinges on organizational objectives such as prioritizing efficient operations or funding based on demand and financial performance.
Recommendation Based on Financial Statement Analysis of Overlay Hospital
We now shift focus to the financial statement analysis of Overlay Hospital. Financial ratios indicate overall health and efficiency, such as liquidity ratios, profitability ratios, and management efficiency. Recommendations may include enhancing operational efficiencies, investing in technology to streamline processes, or adjusting service pricing based on market analysis.
The analysis leads to a set of strategic recommendations to improve financial performance, focusing on sustainable practices and profitability enhancements.
Conclusion
In summary, the allocation of housekeeping services at Ruger Clinic demonstrates the relevance of cost drivers in ensuring departmental equity in budget distribution. The analysis of Overlay Hospital’s financials suggests significant areas for enhancement leading to recommendations aimed at fostering financial performance. The findings underscore the critical connections between operational efficiency and sound financial management practices.
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