Emilio Moreno, the administrator of Cook Community Hospital, has become interested in obtaining more accurate cost allocations on the basis of cause and effect. The $227,360 of laundry costs had been allocated on the basis of 784,000 pounds processed for all departments, or $.29 per pound.
Moreno is concerned that government health care officials will require weighted statistics to be used for cost allocation. He asks you, “Please develop a revised base for allocating laundry costs. It should be better than our present base, but it should not be overly complex either.”
You study the situation and find that the laundry processes a large volume of uniforms for student nurses and physicians and for dietary, housekeeping, and other personnel. In particular, the coats or jackets worn by personnel in the radiology department take an unusual amount of handwork.
A special study of laundry for radiology revealed that 7,000 of the 23,000 pounds were jackets and coats that were five times as expensive to process as regular laundry items. Several reasons explained the difference, but it was principally because of the handwork involved.
Assume that no special requirements were needed in departments other than radiology. Revise the cost-allocation base to take into account that jackets in the radiology department use five times as much of the laundry resources as regular laundry items and compute the new cost-allocation rate. Compute the total cost charged to radiology using pounds and using the new base.