Chapter 15 Question 1 Cost Allocation

Dave Monette vacationed at Lake Tahoe last winter. Unfortunately, he broke his ankle while skiing and spent two days at the Sierra University Hospital.

Monette's insurance company received a $4,700 bill for his two-day stay.

One item that caught Monette's attention was an $10.58 charge for a roll of cotton. Monette is a salesman for Johnson \& Johnson and knows that the cost to the hospital of the roll of cotton is between $2.10 to $2.90. He asked for a breakdown of the $10.58 charge. The accounting office of the hospital sent him the following information: Dave Monette vacationed at Lake Tahoe last winter. Unfortunately, he broke his ankle while skiing and spent two days at the Sierra University Hospital. Monette's insurance company received a $4,700 bill for his two-day stay. (Click the icon to view the cost data.) Monette believes the overhead charge is outrageous. 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 roll. I brought my own."' Read the Requirement 1. Compute the overhead rate Sierra University Hospital charged on the cotton roll. Begin by determining the formula, then calculate the overhead rate. (Enter the percentage as a whole number.) 1. Compute the overhead rate Sierra University Hospital charged on the cotton roll. 2. What criteria might Sierra use to justify allocation of the overhead items b-i in the preceding list? Examine each item separately and match it to the appropriate criteria. 3. What should Monette do about the $10.58 charge for the cotton roll? a. Invoiced cost of cotton roll b. Cost of processing paperwork for purchase $2.30 c. Supplies-room management fee 0.57 d. Operating-room and patient-room handling costs 0.69 e. Administrative hospital costs 1.57 f. University teaching-related costs 1.09 g. Malpractice insurance costs 0.63 h. Cost of treating uninsured patients 1.22 i. Profit component 1.89 Total \begin{tabular}{rr} & 0.62 \\ \hline$10.58 \\ \hline \hline \end{tabular}