Allocate the support department cost to operating departmentusing Direct Method. The information for the recent period is asfollows:
Support Department Operating Department Administration Housekeeping Medical Dental Total Cost 32400 48600 127,000 106,000 314,000
Possible Allocation Bases:
Support Department Operating Department Administration Housekeeping Medical Dental Total No. of Employees 2 2 5 3 12 Square Feet 900 100 8000 1000 10,000
Administration Cost will be allocated using number of employeesand Housekeeping cost will be allocated using square feet.
Allocate the support department cost to operating departmentusing Direct Method. The information for the recent period is asfollows:
| Support Department | Operating Department | ||||
| Administration | Housekeeping | Medical | Dental | Total | |
| Cost | 32400 | 48600 | 127,000 | 106,000 | 314,000 |
Possible Allocation Bases:
| Support Department | Operating Department | ||||
| Administration | Housekeeping | Medical | Dental | Total | |
| No. of Employees | 2 | 2 | 5 | 3 | 12 |
| Square Feet | 900 | 100 | 8000 | 1000 | 10,000 |
Administration Cost will be allocated using number of employeesand Housekeeping cost will be allocated using square feet.
Related questions
You are working in accounting department of Frank Compagny.
You will allocate the support department costs to operating departments using Direct Method. You have also to explain the details of calculations to Mr Ibrahim who is a student having training in Frank company (you will explain the formulas used in the calculations to Mr Ibrahim).
The information for the current period is as follows:
| Support Departments | Operating Departments | ||||
| Administration | Houskeeping | Medical | Dintal | Total | |
| cost | 32,400 | 50,000 | 130,000 | 180,000 | 310,000 |
Allocation Bases:
| Support Departments | Operating Departments | ||||
| Administration | Houskeeping | Medical | Dental | Total | |
| No. of Employees | 2 | 2 | 6 | 2 | 12 |
| Square Feet | 900 | 100 | 6,000 | 4,000 | 11,000 |
Administration Cost will be allocated using number of employees and Housekeeping cost will be allocated using square feet.
Explain to Mr Ibrahim the objectives of allocation of support department costs.
Discuss with Mr Ibrahim why you are using the direct method. What are the other possible methods? What is the difference between these methods and when we will have to use each method?
Gordon County Hospital (GCH) is a rural hospital. The financial statements for GCH are provided in Exhibit 1. The new CEO of the hospital is concerned that GCH does not have appropriate costing for management purposes. Accordingly she has discussed with the hospitalâs controller the current costing methodology.
The controller has explained that the revenue centers are considered profit centers so that all direct costs of each revenue center are subtracted from revenues generated in primary patient care, labs and imaging. All of the support department costs are considered overhead and not currently allocated to any of the profit centers.
The controller who began in the financial services area as an Accounts Receivable clerk and worked her way up the chain of command to controller indicates that the hospital is operating at a profit of about $12 million. Furthermore she states that each of the profit centers are profitable. the primary patient care profit center has a $20 million profit followed closely by labs as can be seen through Exhibit 1.
The CEO has asked the controller to allocate the overhead, or support service department cost, to each of the profit centers. Accordingly controller returns to her office and is contemplating how to allocate support Service department costs to each of the profit centers. She knows that you have recently completed an MBA and asked for your advice about how to allocate support service department costs.
You tell her that there are several methodologies that would be appropriate. You know that perhaps the simplest approach would be to use the direct method to allocate service department cost to each of the profit centers. She responds that she knows that the overhead cost allocation should follow some logical and systematic basis along the lines of what has caused the cost. She asked for your advice about what you believe would be the best method to allocate each service department cost.
You reflect on the nature of each service department one by one. You know that financial services essentially does all the billing and handling of insurance. Facilities you understand takes care of all of the maintenance of the hospital. Maintenance of equipment for specialized equipment is done by technicians who are specially contracted by each profit center and their costs are therefore considered direct to each profit center. The hospital employs housekeeping personnel that clean the hospital, wash laundry and so forth. Administration is responsible for overseeing the operations of the hospital. Personnel department is essentially a human resource department.
In your opinion, with this limited data, what are the cost drivers of each support department cost? Provide a rationale for each driver.
| Exhibit 1 | |
| Gordon County Hospital | |
| Projected Revenues by Patient Services Department | |
| Primary Patient Care | $ 40,000,000 |
| Labs | $ 34,000,000 |
| Imaging | $ 6,000,000 |
| Total Revenues | $ 80,000,000 |
| Projected direct Costs | |
| Primary Patient Care | $ 20,000,000 |
| Labs | $ 15,000,000 |
| Imaging | $ 3,000,000 |
| Total Costs | $ 38,000,000 |
| Support Services Departments (Overhead Costs): | |
| Financial Services | $ 1,500,000 |
| Facilities | $ 3,800,000 |
| Housekeeping | $ 1,600,000 |
| Administration | $ 4,400,000 |
| Personnel | $ 2,550,000 |
| Total Costs | $ 13,850,000 |
| Total costs of both patient and support services | $ 51,850,000 |
| Projected profit | $ 28,150,000 |
Part A, 2
Next, make the allocation on the basis of the following data. Exhibit 3 shows data for square feet, housekeeping labor hours and salaries for each of the three production departments. First calculate an allocation rate (show your work), then allocate costs and calculate profit (including direct costs) for each of the production departments. Cost drivers and total cost pool for each support department is listed below:
| Department | Cost Pool (Total Costs) | Cost Driver | Total Utilization |
| Financial Services | $ 1,500,000 | Patient Revenue | $ 80,000,000 |
| Facilities | $ 3,800,000 | Square Feet | $ 300,600 |
| Housekeeping | $ 1,600,000 | Labor Hours | $ 91,000 |
| Administration | $ 4,400,000 | Salary Dollars | $ 10,183,000 |
| Personnel | $ 2,550,000 | Salary Dollars | $ 10,183,000 |
Prepare a schedule illustrating the allocation of support department costs to each of the production departments and calculate the total costs (allocated support department costs + direct costs) and the net income of each production department after all costs have been allocated.
