Littleton Medical Center
Littleton Medical Center (LMC) has three service departments (accounting, human resources, and janitorial/maintenance) and two patient units: hospital and an outpatient clinic. The following table summarizes the operations of LMC for the last fiscal year.
Service Departments | Service Department Cost (000) |
Human resources | $1,200 |
Accounting | $1,600 |
Janitorial/Maint. | $2,400 |
These department costs are allocated to the two patient units (hospital and clinic). The following table summarizes the allocation bases used to allocate each service department and the utilization of each allocation base.
|
| Service Departments | Patient Units |
| ||
Service Departments | HR | Acctg | Jan/Maint | Clinic | Hospital | Allocation Base |
Human resources |
| 50 | 150 | 2,000 | 3,000 | Employees |
Accounting | 50 |
| 100 | 6,000 | 4,000 | Transactions(000) |
Janitorial/Maint. | 8,000 | 9,000 |
| 150,000 | 400,000 | Square feet |
Required:
a. Allocate the three service departments’ costs (HR, Accounting, and Janitorial/Maintenance) to the two patient units (Clinic and Hospital) using the direct allocation method.
b. Allocate the three service departments’ costs (HR, Accounting, and Janitorial/Maintenance) to the two patient units (Clinic and Hospital) using the step-down allocation method. The order of the three departments is: first, HR; second, Accounting; and third, Janitorial/Maintenance.
c. What are the primary advantages of the step-down method compared to the direct allocation method?
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