Refer To Problem 6.1. Assume The Three Patient Services ✓ Solved

Refer to Problem 6.1. Assume that the three patient services departments

Assuming the three patient services departments in Ruger Clinic—adult services, pediatric services, and other services—have different revenue and housekeeping hours, we are asked to allocate the total housekeeping costs ($100,000) to each department based on two different cost drivers: patient services revenue and hours of housekeeping services used.

The specifics for each department are as follows:

• Adult Services: Revenue = $3,000, Housekeeping Hours = 2,000
• Pediatric Services: Revenue = $1,500, Housekeeping Hours = 1,500
• Other Services: Revenue = $500, Housekeeping Hours = 1,000

First, we will calculate the allocations using each driver separately, then compare the differences, and finally evaluate which driver is better for allocating costs based on accuracy and relevance.

Step 1: Calculate total values for each driver

• Total revenue: $3,000 + $1,500 + $500 = $5,000
• Total housekeeping hours: 2,000 + 1,500 + 1,000 = 4,500

Step 2: Calculate allocation rates

a) Using patient services revenue as the cost driver

The rate per dollar of revenue is calculated as:

Rate per dollar = Total costs / Total revenue = $100,000 / $5,000 = $20 per dollar

For each department, the allocated cost is:

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

b) Using hours of housekeeping services as the cost driver

The rate per housekeeping hour is:

Rate per hour = $100,000 / 4,500 hours ≈ $22.22 per hour

Allocation for each department:

• Adult Services: 2,000 hours x $22.22 ≈ $44,440
• Pediatric Services: 1,500 hours x $22.22 ≈ $33,330
• Other Services: 1,000 hours x $22.22 ≈ $22,220

Step 3: Compare the allocations and determine which driver is better

Differences in allocations are:

• Adult Services: $60,000 (revenue) vs. $44,440 (hours) — difference of $15,560
• Pediatric Services: $30,000 vs. $33,330 — difference of $3,330
• Other Services: $10,000 vs. $22,220 — difference of $12,220

The revenue-based method allocates more to departments with higher revenue, while the hours-based method allocates more to departments with longer housekeeping hours.

The better driver depends on whether revenue generation or utilization of housekeeping services best reflects the actual costs. Given that the primary purpose of housekeeping is to support clinical activities related to patient care, the hours of housekeeping services may be a more accurate driver because it directly relates to the actual consumption of housekeeping resources. Therefore, using hours as the driver could be more appropriate to fairly allocate costs.

Conclusion

The allocation based on hours of housekeeping services appears to better reflect the actual resource consumption related to departmental support, making it a preferable driver for allocating housekeeping costs in this context.

References

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