Question

Texan Community Hospital has been under increasing pressure to be accountable for its patient charges. The...

Texan Community Hospital has been under increasing pressure to be accountable for its patient charges. The hospital currently uses the traditional allocation method and allocates its total costs to its three Departments, Cardiac, Oncology, and Orthopedic based on number of patients treated in the Departments. The hospital’s controller has suggested that the hospital improve pricing policies by seeking a tighter relationship between costs and pricing. She has suggested using activity based costing method and has determined that costs can be assigned to one of three cost pools. The three cost pools follow along with the estimated amounts and activity drivers.

Activity Center

Costs

Activity Driver

Quantity

Professional Salaries

$14,300

Professional Hours

7,600

Building costs

$7,900

Square Feet Used

5,725

Medical Supplies

$9,550

Patients Served

350

  

Details for each Department follow:

Department

Professional Hours

Square Feet

Number of Patients

Cardiac

2,475

1,250

100

Oncology

3,000

2,850

130

Orthopedic

2,125

1,625

120

Total Activity

7,600

5,725

350

3A)      What is the cost allocation to each Department under the traditional method?

3B)      What is the cost allocation to each Department under the ABC method?

please show all work and equations

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Homework Answers

Answer #1

Total overhead cost = 14,300+7,900+9,550 = $31,750

3A) Traditional method uses number of patients to allocate the total overhead cost.

Total number of patient treated = 350

Allocation of overhead cost based on number of patients treated

Cardiac = (31,750/350)*100 = $9,071.43

Oncology = (31,750/350)*130 = $11,792.86

Orthopedic = (31,750/350)*120 = $10,885.71

3B) Allocation of overhead cost based on ABC method

Cardiac = (14,300/7,600)*2475 + (7900/5725)*1250 + (9550/350)*100

= 4,656.91 + 1,724.89 + 2,728.57

= $9,110.37

Oncology = (14,300/7600)*3000 + (7900/5725)*2850 + (9550/350)*130

= 5,644.74 + 3,932.75 + 3,547.14

= $13,124.63

Orthopedic = (14300/7600)*2125 + (7900/5725)*1625 + (9550/350)*120

= 3998.36 + 2242.36 + 3274.86

= $9,515.58

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