Question

Lexington hospital has the following departments: administration, housekeeping, marketing, medical/surgical unit, intensive care unit.

List each of three cost allocation methods, and use diagrams to describe each. Waht cost driver would you use to allocate costs for each of the non-revenue producing departments? Why did you choose each cost driver?

Answer 1

Anonymousanswered this

The three allocation methods are

1. Direct Allocation Method:

	Housekeeping	Surgical Unit	ICU	Administration	Marketing
Housekeeping				xxx	xxx
Surgical				xxx	xxx
ICU				xxx	xxx

Here, the service department costs are only allocated to the administration and marketing.

2. Step Allocation Method:

Here, the service department overhead are allocated stepwise

This is understood by following diagram,

	Housekeeping	Surgical Unit	ICU	Administration	Marketing
Housekeeping		xxx	xxx	xxx	xxx
Surgical Unit			xxx	xxx	xxx
ICU				xxx	xxx

3. Reciprocal Method:

All service department overheads are allocated to each and every other department including Service Department,

	Housekeeping	Surgical Unit	ICU	Administration	Marketing
Housekeeping		xxx	xxx	xxx	xxx
Surgical Unit	xxx		xxx	xxx	xxx
ICU	xxx	xxx		xxx	xxx

.

Cost Drivers used may be,

1. Housekeeping - Housekeeping hours, becaue the overhead is driven by such housekeeping hours.

2. Surgical Unit - Number of Surgeries, as it is driven by the number of surgeries made.

3. ICU - Number of patients, as it is driven by the number of patients occupy the unit.