Question

Lexington hospital has the following departments: administration, housekeeping, marketing, medical/surgical unit, intensive care unit.

List each of three cost allocation methods, and use diagrams to describe each. Waht cost driver would you use to allocate costs for each of the non-revenue producing departments? Why did you choose each cost driver?

Answer 1

The three allocation methods are

1. Direct Allocation Method:

Here, the service department costs are only allocated to the administration and marketing.

2. Step Allocation Method:

Here, the service department overhead are allocated stepwise

This is understood by following diagram,

3. Reciprocal Method:

All service department overheads are allocated to each and every other department including Service Department,

.

Cost Drivers used may be,

1. Housekeeping - Housekeeping hours, becaue the overhead is driven by such housekeeping hours.

2. Surgical Unit - Number of Surgeries, as it is driven by the number of surgeries made.

3. ICU - Number of patients, as it is driven by the number of patients occupy the unit.