Complete problem 11a concerning cost allocation on page 573 of Financial Management of Health Care Organizations (linked in Resources). Show all of your calculations in an Excel spreadsheet. Post your spreadsheet and ask related questions or offer comments about it.
Cost allocation. Use the information in Exhibit 12.11 to answer these questions
Louis Clark, the new administrator for the surgical clinic, was trying to figure out how to allocate his indirect expenses. His staff were complaining that the current method of taking a percentage of revenues was unfair. He decided to try to allocate utilities expense based on square footage for each department, to allocate administration expense based on direct costs, and to allocate laboratory expense based on tests. What would the results be?
Exhibit 12.11 Basic Statistics For Cost Allocation in a Surgery Clinic
A B C
Square Feet Dept Costs Lab Tests
Utilities $400,000
Administration 4,000 $700,000
Laboratory 2,000 $750,000
Day-op suite 4,000 $2,500,000 6,000
Cystoscopy 2,000 $575,000 2,000
Endoscopy 1,000 $300,000 1,500
Total 13,000 $5,225,000 9,500
Answer.
The reciprocal method allocates services department costs to operating departments and other service departments.Under the reciprocal cost, The relationship between service department is recognized and cost is allocated to and form each service department for service provided.
| Departments | Utilities | Administration | Laboratory | Day of suit | cystoscopy | Endoscopy | total |
| Departmental cost before allocation | $400,000 | $700,000 | $750000 | $2500,000 | $575000 | $300,000 | $5225000 |
| Lab test | $6000 | $2000 | $1500 | $9500 | |||
| Total cost per unit | $400,000 | $700,000 | $750000 | $2506000 | $577000 | $301500 | $5234500 |
| Square feet | 0 | $4000 | $2000 | $4000 | $2000 | $1000 | $13000 |
| Total cost | $400,000 | $2800,000,000 | $1500,000,000 | $10,024,000,000 | $1,154,000,000 | $301,500,000 | $68,048,500,000 |
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