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Finance: Cost Allocation for St. Mary's Hospital

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Assume that the hospital uses salary dollar as the cost driver for the General Administration, housekeeping labor hours as the cost driver for Facilities, and patient services revenue as the cost driver for Financial Services. (The majority of the costs of the Facilities Department are devoted to housekeeping services)

a. What are the appropriate allocations rates?

b. Allocate the hospital's overhead cost to the patient services departments.

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The solution explains how to allocate service department costs to patient services departments.

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Finance

St Mary's Hospital has three support departments and four patient services departments. The direct cost to each of the support departments is as follows:

General Administration $2,000,000
Facilities: $5,000,000
Financial Services: $3,000,000

1. Assume the hospital uses the direct method for cost allocation. Furthermore, the cost driver for the General Administration and Financial Services is patient services revenue, while the cost driver for Facilities is space utilization.

a. What are the appropriate allocation rates?

b. Allocate the hospital overhead costs to the patients services department.

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