Question

Question 3 Small Town hospital splits its service into two categories: general care and obstetrics. Medicare will pay the hospital 120% of the total cost incurred to treat Medicare patients. The hospital has two service departments: general records and dietary. The general records’ costs are allocated to departments based upon a log of hours spent for each department. Dietary costs are allocated on the basis of the number of meals served. Results for the past period are summarized below Records Dietary General Care Obstetrics Labour cost $3,000 $8,000 $40,000 $60,000 Supplies $4,000 $35,000 $25,000 $15,000 Meals served 100 100 700 200 Record hours 40 50 100 50 During the period 60% of the general care patients were Medicare patients. None of the obstetrics patients were Medicare patients.

Required If you were the hospital’s senior accountant, how would you determine the amount of the medicare reimbursement? Advise the finance director, with supporting calculations, the implications of different service department cost allocation approaches in determining the amount of Medicare reimbursement.

Answer 1

A). Direct method:

The amount of medical reimbursement is computed as follows in the excel sheet by using the Direct method:

B). Step-Down method:

The amount of medical reimbursement is computed as follows in the excel sheet by using the Step-down method:

C). Reciprocal method:

The amount of medical reimbursement is computed as follows in the excel sheet by using the reciprocal method:

By using the amount of apportionment, the following equation is made to know the amount of allocation.

Let x be the amount of record department and y be the amount of Dietary department.

x = 0.1y + $7,000                                ……(1)

and

y = 0.25x + $43,000                            ……(2)

put equation 2 in equation 1

x = 0.1(0.25x + $43,000) + $7,000

x = 0.025x + $4,300 + $7,000

0.975x = $11,300

x = 11,589.7436

x = 11,590 (approx.)

Put the value of x in equation 2

y = 0.25($11,590) + $43,000

y = $2,897 + $43,000

y = $45,898

Advice: Since the method of step-down is producing more reimbursement of $74,380 as compared to other allocation method. Thus, it is much better for the hospital.