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In: Finance

South Lancaster Clinic, a multispecialty practice in Boston, Massachusetts, has three revenue-producing patient services departments and...

South Lancaster Clinic, a multispecialty practice in Boston, Massachusetts, has three revenue-producing patient services departments and one support department. The direct cost of the support department is $100,000 which must be allocate to the three revenue-producing patient services departments using the direct method. Two cost drivers are under consideration: patient services revenue and hours of support services used. The patient services revenue and hours of support services used for each department are as follows

Revenue

Support Service Hours

Adult Services

$3,000,000

1,500

Pediatric Services

$1,500,000

3,000

Other Services

$500,000

500

Total

$5,000,000

5,000

a. What is the dollar allocation to each patient services department if patient services revenue is selected as the cost driver?

b. What is the dollar allocation to each patient services department if hours of support services used is selected as the cost driver?

c. Which of the two drivers is better? Please explain.

Solutions

Expert Solution

a. Dollar Allocation Based on Patient Service Revenue

Dollar Allocation Rate = Cost / Patient Service Revenue

Dollar Allocation Rate = 100000 / 5000000

Dollar Allocation Rate = $0.02 per Patient Service Revenue

b. Dollar Allocation Based on Support Service Hours

Dollar Allocation Rate = Cost / Total Support Service Hours

Dollar Allocation Rate = 100000 / 5000

Dollar Allocation Rate = $20 per House Keeping Hour

c. I would recommended Support Service Hours as the basis as we can get information about resource utilization of each Revenue service if cost is allocated based on Cost Center

jeff jeffy answered 1 year ago
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