Brian McGarrigle went to Les Arcs for his annual winter vacation. Unfortunately, he suffered a broken ankle while skiing and had to spend two days at the Hôpital de Grasse. McGarrigle’s insurance company received a €4800 bill for his two-day stay. One item that caught McGarrigle’s eye was an €11.52 charge for a roll of cotton wool. McGarrigle was a salesman for Boots and knew that the cost to the centre of the roll of cotton wool would be in the €2.20 to €3.00 range.

He asked for a breakdown of how the €11.52 charge was derived. The accounting office of the centre sent him the following information:

McGarrigle believes the overhead charge is excessive. He comments, ‘There was nothing I could do about it. When they come in and dab your stitches, it’s not as if you can say, “Keep your cotton wool. I’ve brought my own.”’
Required 1 Calculate the overhead rate Hôpital de Grasse charged on the cotton wool.
2 What criteria might Hôpital de Grasse use to justify allocation of each of the overhead items b to i in the preceding list? Examine each item separately and use the allocation criteria listed in Exhibit5.2 in your answer.
3 What should McGarrigle do about the €11.52 charge for the cotton wool?

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a Invoiced cost of cotton wool roll 2.40 b Processing of paperwork for purchase 0.60 c Supplies room management fee 0.70 d Operating-room and patient-room handling charge 1.60 e Administrative centre costs 1.10 f University teaching-related recoupment 0.60 g Malpractice insurance costs 1.20 h Cost of treating uninsured patients 2.72 i Profit component Total 0.60 11.52