Suppose that St$.$ Benedict$$s Hospital has three support departments and four patient services

departments. The direct costs to each support department are:

General Administration $$2,000,000$

Facilities $5,000,000$

Financial Services $3,000,000$

Selected data for the three support and four patient services departments are as follows:

Department

Patient

Services

Revenue

Space

$($Square Feet$)$

Housekeeping

Labor Hours Salary Dollars

Support

General

Administration

$10,0002,000$ $ $1,500,000$

Facilities $20,0005,0003,000,000$

Financial Services $15,0003,0002,000,000$

Total $45,00010,000$ $ $6,500,000$

Patient services

Routine Care $$30,000,000400,000150,000$ $ $12,000,000$

Intensive Care $4,000,00040,00030,0005,000,000$

Diagnostic Services $6,000,00060,00015,0006,000,000$

Other Services $10,000,000100,00025,0007,000,000$

Total $$50,000,000600,000220,000$ $$30,000,000$

Grand total $$50,000,000645,000230,000$ $$36,500,000$

$6.$ Assume that the hospital uses the direct method for cost allocation. Furthermore,

the cost driver for General Administration and Financial Services is patient services

revenue, while the cost driver for Facilities is space usage.

a$.$ What are the appropriate allocation rates?

b$.$ Allocate the hospital$$s overhead costs to the patient services departments.

$7.$ Assume that the hospital uses the direct method for cost allocation. Furthermore,

salary dollars is the cost driver for General Administration, housekeeping labor

hours is the cost driver for Facilities, and patient services revenue is the cost driver

for Financial Services. $($The majority of the costs of the Facilities Department are

devoted to housekeeping services.$)$

a$.$ What are the appropriate allocation rates?

b$.$ Allocate the hospital$$s overhead costs to the patient services departments.

c$.$ Compare the dollar allocations with those obtained in problem $4\mathrm{.}6.$ Explain the

differences.

d$.$ Which of the two cost driver schemes is better? Explain your answer.

$8.$ Now assume that $$2$ million of Financial Services costs are related to billing and

managerial reporting and $$1$ million are related to payroll and personnel management activities.

a$.$ Devise and implement a direct method cost allocation scheme that recognizes

that Financial Services has two widely different functions.

b$.$ What, if any, additional information would be useful in completing part a$?$

c$.$ What are the costs and benefits to St$.$ Benedict$$s of creating two cost pools for

Financial Services.