Question

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

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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