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# Cost Drivers and Cost Allocation

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Health CO-op is an outpatient surgical clinic that was profitable for many years, but Medicare has cut its reimbursements by as much as 40%. As a results, the clinic wants to better understand its costs. It decides to prepare an activity-based cost analysis, including an estimate of the average cost of both general surgery and orthopedic surgery. The clinic's three cost centers and thier cost drivers are attached.

1. Compute the cost per cost driver for each of the three cost centers

2. Use the results from part 1 to allocate costs from each of the three cost centers to both the general surgery and the orthopedic surgery units. Compute total cost and average cost per patient for both the general surgery and the orthopedic surgery units.

3. Without providing computations, would the average cost of general surgery be higher or lower if all center costs were allocated based on the number of patients? Explain.

#### Solution Summary

The solution explains how to allocate costs using cost drivers. Calculations are formatted in the attached Excel file.

\$2.19

## Cost drivers; Compute allocation rate for indirect cost

The owner of the gym Mr. Ripple, has notified division managers that their job performance evaluations will by highly influenced by their ability to minimize costs. The gym has three division weight lifting, aerobics and spinning. The owner has formulated a report showing how much it cost to operate each of three divisions last year. In preparing the report, Mr. Ripple identified several indirect, costs that must be allocated among the divisions. These indirect cost are \$4,200 of laundry expense \$48,000 of supplies, \$350,000 office rent, \$50,000 of janitorial services, and \$120,000 for administrative salaries. To provide a reasonably accurate cost allocation, Mr. Ripple has identified several potential cost drivers.
These drivers and their association with each division follow.

Accounting

Cost Drivers Weight Lifting Aerobics Spinning Total
# of participants 26 16 14 56
# of instructors 10 8 6 24
Square feet 12,000 6,000 7,000 25,000
# of staff 2 2 1 5

Required;

a-Identify the appropriate cost objects.
b-Identify the most appropriate for each indirect cost, and compute the allocation rate for assigning each indirect cost to cost objects.

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