Your brother is a physician and has decided to start a home health care agency. The state government will reimburse treatment costs for about half of the patients under a new state-sponsored health insurance program for low-income residents. Your brother has asked you to explain the cost report that the state government requires. He tells you that he can use either the step-down or the reciprocal allocation method. He has several choices in allocation bases, but has little choice in the type of cost pools that are allowed.

REQUIRED
A. Explain to your brother the differences in the two allocation methods. Remember that your brother is not familiar with accounting; use language he will understand.
B. Your brother wants to know how to choose the best allocation method and bases for his business. List some of the factors your brother should consider as he makes these decisions.
C. One of the cost pools allowed by the state is a pool for transportation-related costs. Your brother asked colleagues at other home health-care agencies to list the costs they include in this pool. Each organization has some costs that are identical, such as depreciation on vehicles, gas, and repairs. However, other costs in the pool are different; some agencies include facilities-related costs, and others do not. Why would cost pools for the same activity include different types of cost?