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# Allocating Costs in a Hospital Admissions Office

The admissions office of a large hospital has an annual operating budget of \$700,000. These costs are distributed to impatient departments (surgery, medicine, pediatrics, psychiatry) and to outpatient departments (drug treatment, prenatal care, and dialysis). In the past, the admissions office's costs have been allocated to inpatients and outpatients based on the number of patients processed. But now hospital management is seeking some alternative ways to distribute these costs.

The following data for the last 12 months summarize the number of patients, average days per stay, average patient bill, and average number of minutes to register inpatients and outpatients.

# of patients Average days per patient stay Average patient Bill Average minutes to register a patient
Inpatient 25,000 6.50 \$8,200 12
Outpatient 120,000 1.00 700 8

Required:
a. Allocate the admissions office's annual operating budget to inpatient and outpatient categories based on
1. Total number of patients
2. Total number of patient days
3. Total patient billings
4. Total minutes used registering
b. Discuss the managerial implications of these various alternative ways to distribute the admissions office's costs. Which method should the hospital adopt?

#### Solution Preview

The impact of basing the budget on the number of patient seen would drastic tip the scale towards outpatients by allocating 82.76% (\$579,310.34) of the \$700,000 budget. We would potentially damage our brand towards the highest revenue generators based on an average bill per customer of inpatients (\$8200 vs. \$700).

The impact of basing the budget on the number if ...

#### Solution Summary

This solution discusses the implications of the various alternatives in 232 words. Calculations for the allocation of the budget are provided in an attached Excel file.

\$2.19