Question

Respond to the given questions:

Most hospitals use square footage to allocate housekeeping costs. The rationale, of course, is that a patient services department that is twice as big as another will require twice the expenditure of housekeeping resources. The advantage of this cost driver is that it is easy to measure and does not change very often.

The disadvantage of using square footage as the cost driver is that some patient services departments require more housekeeping support due to the nature of the service, even when similarly sized spaces are occupied. For example, emergency departments require more intense housekeeping services than do neonatal care units.

What do you think? Does square footage as a cost driver for housekeeping costs meet the characteristics of an effective cost driver? Why or why not?

Is there a better cost driver available for allocating housekeeping costs? If so, what is it?

Why would it be a more effective cost driver?

Describe how the “new and improved” cost driver would work.

Answer 1

1. The square footage as cost driver for housekeeping costs can be effective cost driver for distributing all the overhead costs if it is not possible for hospitals to further segregate housekeeping costs for patient services departments and support departments seperately . Area occupied by each patient service deprtments can be allocated total overhead cost based on the area occupied by each of them.

2. Housekeeping costs can be allocated in a better way if we segregate the housekeeping costs broadly under two categories

a. Support departments- Facilities Services and General Administration

b. Patient Service departments -Routine care and critical care .

Facilities services costs can be distributed based on footage space required whereas General administration costs can be allocated based on revenue generated by each patient service department. These cost drivers will be more effective as rather disributing costs on footage space it will be more relevant and appropriate to use revenue as basis for general admin costs as footage space is irrelevant for such costs.

Overhead rates can be calculated for each of them seperately and then distribution done.

3. Working shown through an example

Eg:

Support Departments (Direct Costs)

Facilities Services $ 8,600,000

General Administration 5,250,000

    Total overhead costs $13,850,000

Square Feet     Revenue

Routine Care 261,000 $22,000,000

Critical Care 39,600       5,000,000

Total 300,600 $27,000,000

Facilities services overhead rate= $8,600,000 / 300,600 = $28.61 per sq. ft

General Admn overhead rate = $5,250,000 ÷ $27,000,000 = $0.194 per dollar

These rates will be used to identify costs for Routine care and critical care.

Eg:

Cost allocated to Routine Care

      $28.61 x 261,000 = $7,467,066

Cost allocated toCritical Care

      $28.61 x 39,600 = $1,132,934

Thus total of $8,600,000 as given above.