Question
In: Accounting
Tacoma Hospital has three support departments and four patient services departments. The direct costs to each...
Tacoma Hospital has three support departments and four patient services departments. The direct costs to each of the support departments are as follows:
Tacoma Hospital has three support departments and four patient services departments. The direct costs to each of the support departments are as follows:
|
Direct Costs |
Cost Driver |
|
|
General Administration |
$2,000,000 |
Salary Dollars |
|
Facilities |
$5,000,000 |
Housekeeping Labor Hours |
|
Financial Services |
$3,000,000 |
Patient Services Revenue |
|
Total |
$10,000,000 |
The patient services revenue, salary dollars, and housekeeping labor hours for each department are as follows:
|
Revenue |
Salary Dollars |
Housekeeping Labor Hours |
|
|
General Administration |
$1,500,000 |
2,000 |
|
|
Facilities |
$3,000,000 |
5,000 |
|
|
Financial Services |
$2,000,000 |
3,000 |
|
|
Routine Care |
$30,000,000 |
$12,000,000 |
150,000 |
|
Intensive Care |
$4,000,000 |
$5,000,000 |
30,000 |
|
Diagnostic Services |
$6,000,000 |
$6,000,000 |
15,000 |
|
Other Services |
$10,000,000 |
$7,000,000 |
25,000 |
Assume that the hospital uses the step-down method for cost allocation (see pages 230 0 232), with salary dollars as the cost driver for general administration, housekeeping labor hours as the cost driver for facilities, and patient services revenue as the cost driver for financial services. Assume also that the general administration department provides the most services to other support departments, followed closely by the facilities department. The financial services department provides the least services to the other support departments.
a. Use an allocation table to allocate the hospital’s overhead costs to the patient services departments.
b. Is the direct method or the step-down method better for cost allocation within Tacoma Hospital’s? Please explain.
Solutions
Expert Solution
| Allocation of support department overhead costs based on drivers will be as follows: | |||||
| Total | Routine Care | Intensive Care | Diagnostic Services | Other Services | |
| General Administration (12:5:6:7) | 20,00,000 | 8,00,000 | 3,33,333 | 4,00,000 | 4,66,667 |
| Facilities (15:3:1.5:2.5) | 50,00,000 | 34,09,090.91 | 6,81,818.18 | 3,40,909 | 5,68,182 |
| Financial Services(30:4:6:10) | 30,00,000 | 18,00,000 | 2,40,000 | 3,60,000 | 6,00,000 |
| Total Overhead Costs | 1,00,00,000 | 60,09,091 | 12,55,152 | 11,00,909 | 16,34,848 |
b.
| Step down method is better for cost allocation within Tacoma Hospital because support department are providing services to each other, therefore in order ensure correct allocation, support department cost should be allocated to other support department and after that cost should be allocated to patient service department |
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