29 Jan Assume that the hospital
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:
Department
Direct Support Department Costs
Patient Services Revenue
Space (square feet)
Number of Full-Time Equivalent Employees
Salary Dollars
Support:
General Administration
$ 40,00,000
8,000
15
$ 25,00,000
Maintenance
$ 50,00,000
10,000
75
35,00,000
Employee Benefit
$ 40,00,000
7,000
50
30,00,000
Total
$ 1,30,00,000
25,000
140
$ 90,00,000
Patient Services:
Routine Care
$ 4,00,00,000
5,00,000
700
$ 1,80,00,000
Intensive Care
70,00,000
45,000
200
60,00,000
Obstetrics Services
40,00,000
35,000
150
40,00,000
Other Services
1,20,00,000
2,00,000
400
80,00,000
Total
$ 6,30,00,000
7,80,000
1,450
$ 3,60,00,000
Grand Total
$ 6,30,00,000
8,05,000
1,590
$ 4,50,00,000
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.
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. 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.
a. What are the appropriate allocation rates?
b. b. Allocate the hospital’s overhead costs to the patient services departments.
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