Return to the direct method of cost allocation and use the same cost drivers as specified in Problem 6.4 for General Administration and Facilities. 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 Financial Services has two widely different functions.
b. Is there any additional information that 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?
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 are devoted to 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