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Cost Allocation Methods: Direct, Step-Down, and Reciprocal

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I would like help on identify the relative advantages and disadvantages of each of the three primary cost allocation methods (Direct Allocation, Step-Down Allocation, and Reciprocal Allocation).

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Please see the advantages and disadvantages of above said methods

Advantages and Disadvantages of Direct Allocation, Step-Down Allocation, and Reciprocal Allocation of Costing

Cost allocation means assignment of indirect cost to particular cost object. Following are some of the cost allocation techniques with their advantages and disadvantages. ...

Solution Summary

Advantages and disadvantages of each of the three primary cost allocation methods (Direct Allocation, Step-Down Allocation, and Reciprocal Allocation) are given in the solution.

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Role of Cost in Decision Making in Healthcare Industry

Please answer all questions thoroughly and no plagarism. Please review all answers.

Course material: Neumann, B. R., Clement, J. P., and Cooper, J. C. Financial Management: Concepts and Applications for Health Care Organizations. Dubuque, IA: Kendall/Hunt Publishing Company, 1999, 239.

1. Where would you most likely find each of the following expenses listed: Administration, Physical Therapy, Nursing, or Maintenance?

a. The Administrator's salary

b. Pharmacy supplies

c. Crutches

d. Fuel

e. Clerical office help

f. Office supplies

g. Physical therapy salaries

h. The salary for the Director of Nursing

i. RN wages

j. Snowplowing expenses

k. Staff education on how to use crutches with a patient

l. Health insurance for the clerical staff in the physical therapy department.

2. Identify each of the following as either direct costs or indirect costs?

a. Real estate taxes

b. Clinic telephone expense

c. Oil for the heat for the whole facility

d. Emergency room medical supplies

e. Liability insurance

f. Nursing wages for the operating room

g. Food for the residents in the medical surgical unit

h. Diapers for the babies in the nursery

i. Computer system for the facility

j. Marketing expense for the new wing

3. What is the contribution margin in the following example?

a. Revenues: $1,200,000

b. Variable Costs: $ 215,000

c. Fixed Costs: $1,000,000

What is the contribution margin percentage?

4. Explain, in your own words, the relative advantages and disadvantages of each of the three primary cost allocation methods (Direct Allocation, Step-Down Allocation, and Reciprocal Allocation).

5. Using the following example, allocate service center costs to each of the three revenue centers using the step-down method:
Full-time Costs Square Feet Meals Employees
Service Centers
Maintenance $150,000 ---- 2,500 10
Dietary 400,000 10,000 ---- 15 Administrative 600,000 20,000 2,500 10
Revenue Centers
Laboratory 600,000 30,000 2,500 20
Radiology 800,000 40,000 2,500 30
Nursing 2,000,000 100,000 30,000 50
$4,550,000 200,000 40,000 135

6. List three examples of Relative Value Units (RVUs) common to health care.

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