Question

4.8 Now assume that $2 Million of Financial Services cost are related to billing and managerial reporting and $1 million are related to payroll and personnel management activities.

                a. Devise and implement a direct method cost allocation scheme that recognizes that Financial Services has two widely different functions.

                b. What, if any, additional information would be useful in completing part a?

                c. What are the cost and benefits to St. Benedict’s of creating two cost pools for Financial Services?

Answer 1

Answer :

(a) Appropriate allocation Rates

	General administration (on the basis of salary dollars)	Facilities (on the basis of house keeping labor house)	Financial services (on the basis of patient service revenue)
Routine care	12/30 = 40%	15/22 = 68.18%	3/5 = 60%
Intensive care	5/30 = 16.67	3/22 =13.64	0.4/5 = 8%
Diagnostic services	6/30 = 20%	1.5/22 = 6.82%	0.6/5 = 12%
Other Services	7/30 = 23.33%	2.5/22 =11.36%	1/5 =20%

(b). Overhead analysis sheet

Items	Basis of charges	Patient service department				Patient support department
		Routine care	Intensive care	Diagnostic care	Other services	General administration	Facilities	Financial Services
Direct cost						$2,000,000	$5,000,000	$3,000,000
General administration	Salary dollar	$800,000	$333,333	$400,000	$466,667	($2,000,000)
Facilities	House keeping labor hours	$3,409,091	$681,818	$340,909	$568,182		($5,000,000)
Financial services	Service Revenue	$1,800,000	$240,000	$360,000	$600,000			($3,000,000)
Total overheads		$6,009,091	$1,255,151	$1,100,909	$1,634,849	$0	$0	$0

(c) Comparison of dollar allocation

	Routine care	Intensive care	Diagnostic services	Other services
Dollar allocation in 6.3	$6,333,333	$733,333	$1,100,000	$1,833,334
Dollar allocation in 6.4	$6,009,091	$1,255,151	$1,100,909	$1,634,849
Difference	$324,242	($521,818)	($909)	$198,485