1. Below is a cost-allocation problem. You are given the nonrevenue center bases for allocation and the direct costs for each cost center. Allocate the nonrevenue cost center costs to the revenue centers using step-down allocation. Then allocate them again. The second time, change the order of allocation. Did it change the total direct and indirect costs of each revenue center? By how much? Note that administration costs are allocated based on the direct cost of each cost center, under the good-enough assumption that cost centers with more costs require more administrative supervision. Nursing is allocated based on nursing hours, under the good-enough assumption that a cost center consuming twice as many nursing hours is consuming twice as much nursing costs.

Exhibit 9-1 Allocation Bases

Cost Base Information for Allocation

	Nonrevenue Cost Centers		Revenue Cost Centers
	Administration	Nursing	Operating Room	Per Diem	Total Cost
Direct cost	$100,000	$300,000	$100,000	$0	$500,000
Allocation Statistics
Administration			$25,000
Direct costs		75%	25%	0%	100%
Nursing
Nursing hours	10%		20%	70%	100%