The following data pertain to problems 6.3 through 6.6: St. Benedict's Hospital has three support departments and four patient ser vices departments.

The direct costs to each of the support departments 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

Patient Space Services (Square Housekeeping Salary

Department Revenue Feet) Labor Hours Dollars

Support: General 10,000 2,000 $1,500,000 Administration Facilities 20,000 5,000 3,000,000 Financial Services 15,000 3,000 2,000,000 Total 45,000 10,000 $6,500,000

Patient Services: Routine Care $30,000,000 400,000 150,000 $12,000,000 Intensive Care 4,000,000 40,000 30,000 5,000,000 Diagnostic Services 6,000,000 60,000 15,000 6,000,000 Other Services 10,000,000 100,000 25,000 7,000,000

Total $50,000,000 600,000 220,000 $30,000,000

Grand Total $50,000,000 645,000 230,000 $36,500,000

6.3 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 utilization. a. What are the appropriate allocation rates? b. Use an allocation table similar to Exhibit 6.7 to allocate the hospital's overhead costs to the patient services departments.

6.4 Assume that the hospital uses salary dollars as the cost driver for general administration, housekeeping labor hours as the cost driver for facilities, and patient services revenue as the cost driver for financial services. (The majority of the costs of the facilities department stem from the provision of housekeeping services.) a. What are the appropriate allocation rates? b. Use an allocation table similar to the one used for Problem 6.3 to allocate the hospital's overhead costs to the patient services departments. c. Compare the dollar allocations with those obtained in Problem 6.3. Explain the differences. d. Which of the two cost driver schemes is better? Explain your answer.

6.5 Now assume that the hospital uses the step-down method for cost al location, with salary dollars as the cost driver for general administration , housekeeping labor hours as the cost driver for facilities, and patient ser vices revenue as the cost driver for financial services. Assume also that the general administration department provides the most services to other support departments, followed closely by the facilities department . The financial services department provides the least services to the other sup port departments. a. Use an allocation table to allocate the hospital's overhead costs to the patient services departments. b. Compare the dollar allocations with those obtained in Problem 6.4. Explain the differences. c. Is the direct method or the step-down method better for cost allocation within St. Benedict' s? Explain your answer. 6.6 Return to the direct method of cost allocation and use the same cost drivers as specified in Problem 6.4 for the general administration and facili ties departments . However, assume that $2,000,000 of financial services costs are related to billing and managerial reporting and $1,000,000 are related to payroll and personnel management activities. a. Devise and implement a cost-allocation scheme that recognizes that the financial services department has two widely different functions . b. Is there any additional information that would be useful in complet ing Part A? c. What are the costs and benefits to St. Benedict's of creating two cost pools for the allocation of financial services costs?