Problem

Rose HospitalRose Hospital has two service departments (building services and food service...

Rose Hospital

Rose Hospital has two service departments (building services and food service), and three patient care units (intensive care, surgery, and general medicine). Building Services provides janitorial, maintenance, and engineering services as well as space (utilities, depreciation, insurance, and taxes) to all departments and patient care units. Food Service provides meals to both patients and staff members. It operates a cafeteria and serves meals to patients in their rooms. Building services costs of $6 million are allocated based on square footage, and food service costs of $3 million are allocated based on number of meals served. The following two tables summarize the annual costs of the two service departments and the utilization of each service department by the other departments.

 

Annual Cost* (Millions)

Building Services

$6.0

Food Service

3.0

Total overhead

$9.0

*Before allocated service department costs

Utilization Patterns

 

Allocation Base

Building Services

Food Services

Intensive Care

Surgery

General Medicine

Total

Building Services

Square footage

2,500

15,500

10,000

20,000

40,000

88,000

Food Service

Meals

12,000

10,000

3,000

4,000

98,000

127,000

The following table summarizes the allocation of service department costs using the step-down method with Food Service as the first service department to be allocated:

Step-Down Method

(Food Service First) (Millions)

 

Intensive Care

Surgery

General Medicine

Food Service

$0.09

$0.09

$2.52

Building Services

0.88

1.83

3.59

Total

$0.97

$1.92

$6.11

Required:

(Round all allocation rates and all dollar amounts to two decimal places.)

a. Allocate the two service department costs to the three patient care units using the direct method of allocating service department costs.


b. Same as (a) except use the step-down allocation method with Building Services as the first service department allocated.


c. Write a short, nontechnical memo to management explaining why the sum of the two service department costs allocated to each patient care unit in (b) differs from the sum of the costs computed using the step-down method starting with Food Service.

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Solutions For Problems in Chapter 8