Chapter 6 UNDERSTANDING HEALTHCARE FINANCIAL MANAGEMENT, 6th ed
UNDERSTANDING HEALTHCARE FINANCIAL MANAGEMENT
Problem 6.7 – Direct Cost Allocation Method
St. Luke’s Hospital has three support departments and four patient services departments. The direct costs to each of the support departments are as follows:
Patient Services Departments
Department Direct Support Department Costs Patient Services Revenue Space (square feet) Number of Full-Time Equivalent Employees Salary Dollars Allocation Rate Routine Care Intensive Care Obstetrics Services Other Services Total
Support:
- General Administration $4,000,000 8,000 15 $2,500,000
- Maintenance $5,000,000 10,000 75 3,500,000
- Employee Benefit $4,000,000 7,000 50 3,000,000
- Total $13,000,000 25,000 140 $9,000,000
- Patient Services:
- Routine Care $40,000,000 500,000 700 $18,000,000
- Intensive Care 7,000,000 45,000 200 6,000,000
- Obstetrics Services 4,000,000 35,000 150 4,000,000
- Other Services 12,000,000 200,000 400 8,000,000
- Total $63,000,000 780,000 1,450 $36,000,000
- Grand Total $63,000,000 805,000 1,590 $45,000,000
Assume that the hospital uses the direct method for cost allocation. Furthermore, the cost driver for general administration is patient services revenue, the cost driver for maintenance is space utilization, and the cost driver for employee benefits is the number of full-time equivalent employees.
a. What are the appropriate allocation rates?
General Administration $- per dollar of patient services revenue
Maintenance $- per square foot
Financial Services $- per full-time equivalent employees
b. Allocate the hospital’s overhead costs to the patient services departments.
Chapter 6 UNDERSTANDING HEALTHCARE FINANCIAL MANAGEMENT, 6th ed
Problem 6.7 – Direct Cost Allocation Method
St. Luke’s Hospital has three support departments and four patient services departments. The direct costs to each of the support departments are as follows:
Patient Services Departments
Department Direct Support Department Costs Patient Services Revenue Space (square feet) Number of Full-Time Equivalent Employees Salary Dollars Allocation Rate Routine Care Intensive Care Obstetrics Services Other Services Total
Support:
- General Administration $4,000,000 8,000 15 $2,500,000
- Maintenance $5,000,000 10,000 75 3,500,000
- Employee Benefit $4,000,000 7,000 50 3,000,000
- Total $13,000,000 25,000 140 $9,000,000
Patient Services:
- Routine Care $40,000,000 500,000 700 $18,000,000
- Intensive Care 7,000,000 45,000 200 6,000,000
- Obstetrics Services 4,000,000 35,000 150 4,000,000
- Other Services 12,000,000 200,000 400 8,000,000
- Total $63,000,000 780,000 1,450 $36,000,000
- Grand Total $63,000,000 805,000 1,590 $45,000,000
Assume that the hospital uses the Step-down method for cost allocation, with patient service revenue as the cost driver for general administration, space as the cost driver for Maintenance, and salary dollars as the cost driver for employee benefits UNDERSTANDING HEALTHCARE FINANCIAL MANAGEMENT.
Assume also that the employee benefits department provides most services to other support departments, followed closely by general administration. The maintenance department provides the least services to the other support departments.UNDERSTANDING HEALTHCARE FINANCIAL MANAGEMENT
ORDER COMPREHENSIVE SOLUTIONS NOW
a. What are the appropriate allocation rates?
Initial Allocation of EMPLOYEE BENEFIT
Cost pool
Cost Driver (salaries)
Allocation Rate per dollar of salaries
Allocation to GENERAL ADMINISTRATION
Allocation to MAINTENANCE
Subsequent Allocation of GENERAL ADMINISTRATION
Cost pool
Employee Benefit Allocation
Total Cost Pool
Cost Driver (patient service revenue)
Allocation Rate per dollar of patient service revenue
Allocation to MAITENANCE
Subsequent Allocation of MAINTENANCE
Cost pool
Employee Benefit Allocation
General Administration Allocation
Total Cost Pool
Cost Driver (space)
Allocation Rate per square foot
b. Allocate the hospital’s overhead costs to the patient services departments.
UNDERSTANDING HEALTHCARE FINANCIAL MANAGEMENT
