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.
Homework Answers
a.Dollar allocation to each patient services department if patient services revenue is selected as the cost driver:
|
Service Department |
Calculation |
Amount Allocated |
|
Adult Services |
$100,000* $3,000,000/ $5,000,000 |
$60,000 |
|
Pediatric Services |
$100,000* $1,500,000/ $5,000,000 |
$30,000 |
|
Other Services |
$100,000* $500,000/ $5,000,000 |
$10,000 |
|
Total |
$100,000 |
b.Dollar allocation to each patient services department if hours of support services used is selected as the cost driver:
|
Service Department |
Calculation |
Amount Allocated |
|
Adult Services |
$100,000* 1,500/5,000 |
$30,000 |
|
Pediatric Services |
$100,000* 3,000/5,000 |
$60,000 |
|
Other Services |
$100,000* 500/5,000 |
$10,000 |
|
Total |
$100,000 |
c.Hours of support services used is the better driver. Cost should be allocated in the proportion support service is used. It reflects true consumption of resources and better decision making. Hours of Support services used better reflect the consumption pattern of support service rather than revenue generated.
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