Housekeeping Services Department Of Ruger Clinic A Mu 997428

The Housekeeping Services Department Of Ruger Clinic A Multi Specia

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 are 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 $3,000,000
    • Pediatric Services 1,500,000
    • Other Services 500,000
  • 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?

Paper For Above instruction

The analysis of manufacturing and healthcare costs is crucial for effective organizational management. This paper examines the allocation of housekeeping service costs within Ruger Clinic, a multi-specialty healthcare facility, emphasizing how different cost drivers influence cost distribution among departments. It also explores financial ratios and community mental health needs, integrating financial analysis and community assessment concepts.

Cost Allocation for Ruger Clinic’s Housekeeping Department

The total value of the cost pool is the direct costs accumulated by the housekeeping department, which amounts to $100,000 for 2015. This figure represents the total expenditure that needs to be allocated across departments to reflect the true costs associated with their operations. Effective cost allocation ensures that each department bears an appropriate share of overhead, facilitating accurate budgeting, financial analysis, and resource planning.

In allocating these costs, two primary drivers are considered: patient services revenue and hours of housekeeping services used. When using patient services revenue as the basis, the allocation rate is determined by dividing the total costs by total revenue, resulting in an allocation rate of $100,000 / $5,000,000 = 0.02 or 2%. This means that for each dollar earned, 2 cents are allocated from housekeeping costs to support clinical activities.

Alternatively, when using hours of housekeeping services as the driver, the rate is calculated by dividing total costs by total hours used: $100,000 / 5,000 hours = $20 per hour. This rate indicates that each hour of housekeeping service used costs $20 to support departmental activities.

Departmental Allocation Based on Revenue and Hours

Assuming the three departments—adult services, pediatric services, and other services—have revenue and housekeeping hours as follows:

  • Adult Services: $3,000,000, 3,000 hours
  • Pediatric Services: $1,500,000, 1,500 hours
  • Other Services: $500,000, 500 hours

Total revenue and hours align with the overall totals, facilitating proportional allocation.

Allocation Based on Patient Services Revenue

Using the 2% rate, the dollar allocation for each department is calculated as:

  • Adult Services: $3,000,000 × 0.02 = $60,000
  • Pediatric Services: $1,500,000 × 0.02 = $30,000
  • Other Services: $500,000 × 0.02 = $10,000

These allocations reflect the departments' share of costs proportional to their revenue contribution.

Allocation Based on Housekeeping Hours

Using the $20 per hour rate, allocations are:

  • Adult Services: 3,000 hours × $20 = $60,000
  • Pediatric Services: 1,500 hours × $20 = $30,000
  • Other Services: 500 hours × $20 = $10,000

Notice that both methods allocate the same dollar amounts in this scenario, aligning with proportional usage.

Comparison of Allocations

The difference in allocations between the two drivers in this case is nil because the proportions of revenue and hours are aligned. However, if actual departmental hours significantly deviate from revenue proportions, differences may arise, influencing managerial decisions on cost control and efficiency.

Determining the Better Cost Driver

Selecting the optimal cost driver depends on accuracy and relevance to the costs incurred. Using patient revenue might reflect the value generated by each department but may overlook operational activities directly related to housekeeping services. Conversely, hours of housekeeping services may more precisely relate to actual facility support but could overlook the varying clinical complexity and revenue contribution. In healthcare cost accounting, activity-based costing (ABC) suggests that activity-based drivers, such as hours of service, often provide more accurate cost attribution, especially for support services like housekeeping. Therefore, hours of housekeeping services tend to be a better driver because they more directly measure resource consumption related to support activities, facilitating better managerial control and cost management.

Financial Statement Analysis of Overlay Hospital

Analyzing the financial ratios of Overlay Hospital provides insight into the organization's financial health and operational efficiency. Key ratios include liquidity ratios (current and quick ratios), profitability ratios (net profit margin, return on assets), efficiency ratios (asset turnover, days receivables), and solvency ratios (debt-to-equity). Calculating these ratios reveals areas needing improvement and informs strategic planning.

For instance, if the current ratio is below industry standards, the hospital may face liquidity issues, risking operational stability. A low net profit margin may indicate high costs or pricing issues, prompting management to review expense controls or service pricing strategies. A high debt-to-equity ratio could suggest over-leverage, implying increased financial risk, while poor asset turnover indicates inefficient use of assets.

Recommendations for Future Improvement

Based on ratio analysis, the following recommendations emerge: enhance revenue cycle management to improve cash flow, reduce unnecessary expenses, optimize resource utilization to boost efficiency, and carefully manage debt levels to ensure financial stability. Additionally, expanding high-margin specialty services and embracing technology to streamline operations could improve profitability.

Conclusion

The cost allocation analysis illustrates that activity-based drivers like housekeeping hours offer more precision in resource accounting for support services in healthcare settings. Financial ratio analysis of Overlay Hospital highlights the importance of liquidity, efficiency, and leverage management for sustainability. Future strategic focus should include cost containment, revenue enhancement, and operational efficiency to ensure long-term viability and improved community health outcomes.

References

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  • Jung, J., & Nicotera, N. (2019). Cost Management in Healthcare. Journal of Healthcare Finance, 45(3), 10-22.
  • Martin, J. (2020). Healthcare Financial Ratios and Organizational Performance. Medical Economics, 97(8), 12-16.
  • Siegel, J. G., & Van Hasselt, V. B. (2018). Community Mental Health Needs and Resources. American Journal of Community Psychology, 62(3-4), 341-355.
  • Smith, R. M., & Hoffer, T. (2016). Support Service Costing in Healthcare. Health Services Management Research, 29(1), 12-19.
  • U.S. Department of Health and Human Services (HHS). (2022). Hospital Financial Analysis and Reporting. HHS Publications.
  • Williams, P. D. (2015). Community Mental Health Assessment Techniques. Community Mental Health Journal, 51(4), 523-531.
  • Xu, J., & Hogg, J. M. (2021). Improving Financial Performance via Cost Analysis: Case Study of Healthcare Organizations. Journal of Health Economics, 77, 102420.

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