Question

In: Accounting

The London Private Hospital has 3 patient services departments – Adult Medicine, Obstetrics and Paediatrics. It...

The London Private Hospital has 3 patient services departments – Adult Medicine, Obstetrics and Paediatrics. It also has 3 patient support departments – administration, Facilities and Finance. The revenues of the three patient services departments are:

Adult medicine $12 million

Obstetrics $6 million

Paediatrics $2 million

The direct costs of all 6 departments are:

Adult medicine $6 million

Obstetrics $3.6 million

Paediatrics $1.2 million

Administration $1 million

Facilities $4.4 million

Finance $1.8 million

Direct costs of the support departments are allocated to patient services departments using the direct method on the basis of the % of services provided to the support departments to the patient service departments.

The table below gives the percentages of support provided by the support departments to both each other and the services departments. For example, 10% of admin’s services are provided to the finance department and 20% to obstetrics

% of services provided by
service to provide admin facilities finance
admin 0 5 5
facilities 10 0 5
finance 10 10 0
adult medicine 35 55 50
obstetrics 20 10 25
paediatrics 25 20 15
Total 100 100 100

Allocate the support overheads to the 3 patient service departments on the basis of the % of services provided.

b. Calculate the profit and loss position for each of the patient service departments and the hospital as a whole.

c. Should the hospital consider closing down any or all of the patient service departments to increase its profitability or reduce its losses? Explain why or why not.

Hint: All costs of the supporting units are to be allocated to cost objects.

Hint: Allocations rate depends solely on each cost object's cost driver and how much in total is allocated to cost objects

Hint: Allocation rates have a numerator and denominator component. The key is to adjust these based on information provided in the question.

Solutions

Expert Solution

a.

Allocation of overhead cost:

Support department Patient service department
Administration Facilities Finance Adult medicine Obstetrics Pediatrics
Departmental overhead cost $1,000,000 $4,400,000 $1,800,000 $6,000,000 $3,600,000 $1,200,000
Allocation of cost:
Administration cost (35:20:25) (1,000,000) 437,500 250,000 312,500
Facilities cost (55:10:20) (4,400,000) 2,847,059 517,647 1,035,294
Finance cost (50:25:15) (1,800,000) 1,000,000 500,000 300,000
Total $0 $0 $0 $10,284,559 $4,867,647 $2,847,794

b.

Adult medicine Obstetrics Pediatrics Total
Revenues $12,000,000 $6,000,000 $2,000,000 $20,000,000
Less: Cost (10,284,559) (4,867,647) (2,847,794) (18,000,000)
Profit/(Loss) $1,715,441 $1,132,353 ($847,794) $2,000,000

c.

Pediatrics department is incurring loss , however if hospital decides to close this department then it will lose revenue of $2,000,000 however total direct cost will reduce by $1,200,000 but support department cost allocated to pediatrics will be allocated among the other two department hence, hospital will loose profit of $800,000 ($2,000,000-1,200,000).

Hence, hospital should not consider closing down of any of the department.

ekkarill92 answered 2 hours ago
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