HCS660

Week 5

Cost allocation exercise

This question is based on Chapter 6 of Healthcare Finance - An Introduction to Accounting and Financial Management by Louis Gapenski and based on Problems 6.1 and 6.2 in the book.

The housekeeping services department of Ruger Clinic, a multispecialty practice in Toledo, Ohio, had $100,000 in direct costs during 2015.These costs must be allocated to Ruger's three revenue-producing patient services departments using the direct method.Two cost drivers are under consideration: patient services revenue and hours of housekeeping services used.The patient services departments generated $5 million in total revenues during 2015, and to support these clinical activities, they used 5,000 hours of housekeeping services.

I have calculated the cost pool as $100,000 and the allocation rate if patient service revenue is used as the cost driver is 100,000/5,000,000 or $0.02. This means there will be $0.02 in housekeeping costs allocated to the patient services departments for each dollar of patient services revenue generated.

The allocation rate if hours of housekeeping services is used as the cost driver is 100,000/5,000 = $20. This means there will be $20 in housekeeping cost allocated to the patient services departments for each hour of housekeeping services used.

The three patient services departments at Ruger Clinic are adult services, pediatric services and other services.The patient services revenue and hour of housekeeping services for each department are as follows:

Department

Revenue

Housekeeping Hours

Adult Services Revenue $3,000,000 and Housekeeping Hours are 1,500

Pediatric Services Revenue $1,500,000 and Housekeeping Hours are 3,000

Other Services Revenue $500,000 and Housekeeping Hours are 500

Total $5,000,000 in revenue and 5,000 in total housekeeping hours.

Q: Find the dollar allocation to each patient services department if patient services revenue issued as the cost driver? - I calculated these as 60,000, 30,000 and 10,000 respectively

Q: What is the dollar allocation to each patient services department if hours of housekeeping support is used as the cost driver? I calculated these as 30,000 60,000 and 10,000 respectively

I need help with this:

Q: The pediatric services department is not pleased with the quality of cleaning done by housekeeping and decides to hire a janitor who works exclusively in the pediatric services department.As a result the number of housekeeping hours used by pediatric services goes to zero.How will this change the amount of housekeeping cost allocated to pediatric services if "patient service revenue" is the cost driver?How will the staffing change affect the housekeeping allocation to pediatric services if "housekeeping hours" is the cost driver?