Cost Allocation

costs by the total annual number of inpatient days and outpatient visits to obtain a per episode

1.) What is the marginal cost estimate of the Phase 4 hospital services, assuming that 60 percent of the designated costs are fixed and the remaining costs are variable?

Owens & Minor is a distributor of surgical and medical supplies to hospitals and other health care facilities. Due to changing demand from customers, the company is facing increased operating costs, which has resulted in lower profit margins and even losses. In 1993, O&M recorded an $18 million profit, which was reduced to a loss of $11 million in 1995. The entire industry is experiencing similar difficulties. In an effort to resume profitability, O&M is evaluating alternatives to “cost-plus pricing”. Cost-plus pricing does not reflect the true cost of the services provided by O&M. Customers are demanding more of O&M while

1. Is it “fair” for the Dialysis Center to suffer in profitability, and hence for the department head to possibly lose his bonus, just because the Outpatient Clinic needs additional space?

Patients who use peritoneal dialysis change their own cleansing solutions at home, usually about six times per day. This procedure can be done manually when active or automatically by machine when sleeping. However, the patient’s overall condition, as well as the positioning of the catheter, must be monitored regularly by nurses and technicians at the Dialysis Center (Gapenski, pg. 27-28). The Outpatient Clinic currently takes up 80 percent of the space it shares with the Dialysis Center. The recent growth in volume has created a need of 25 percent more space for the Clinic. Its large size compared to the Dialysis Center and its patients frequent use of other departments in the hospital are justifications as to why it was decided to move the Dialysis Center to another building. Big Bend Medical Center currently doesn’t have adequate space to house the Dialysis Center, so it was also decided to build a new 20,000-square-foot building. This expansion and move were went to benefit both departments and help increase patient volume. The goal of increased patient volume is expected, but the directors and other department heads did not agree with the new allocation of indirect costs. In the past, facilities costs were aggregated, so all departments were charged cost based on the average embedded cost regardless of actual age of the space occupied. Since many department heads considered this

Under the current indirect cost allocation scheme (Exhibit 1) the Dialysis Center’s Revenues and Direct Costs are as follows: total revenue is $2,700,000, direct expenses are $2,100,000, the contribution margin is $600,000, and their percent of revenues is 22.2%. Their indirect costs are as follows: facilities cost is $300,000, general overhead is $270,000, and total overhead is $570,000. This leaves the Dialysis Center with $30,000 in net profit and 1.1% in percent of revenues. Additionally, square footage is allocated at $15.00 per square foot on an aggregated basis. Lastly, their general overhead costs are set at 10% of their total revenues.

Model Description The model takes much of the busywork out of the case, enabling students to spend more time on interpretation and evaluation. Like most case models, the student and instructor versions differ only in regard to the input data. The instructor’s version contains the complete base case inputs, while these inputs are zeroed out in the student version of the model. The model for this case takes the input data (cost pool values and allocation rates) and allocates overhead costs from the three overhead departments to the three patient services departments using all four allocation methods. Additionally, the model calculates the profitability of each patient services department under each allocation method. The model’s (instructor’s version) Input Data and Key Output sections are as follows:

Under an ABC system, the allocation of costs to products is achieved through at least four analytical steps. Firstly, costs are grouped into activity levels. Secondly, cost drivers are

Both systems have their advantages and disadvantages, the labor-based allocation method provides a fast straightforward method for businesses with labor intensive processes that in many businesses make up the majority of these costs. For this microbrewery however, especially within overheads the percentage of costs labor attributes towards is relatively minimal. Therefore reducing the effectiveness of such a method. ABC however represents a more in depth look at cost allocation and within such a business where there are a huge variety of factors involved looking at a more segmented form of activity based cost allocation is extremely important.

The capitated managed care agreement with the city allows the hospital to receive $250 per month per family for taking care of the 300 city employees and their families, whether they are sick or not. Utilizing the full cost method, the hospital incurs a profit loss of $51,898,395, meaning that a rate increase of $14,166.22 is required in order to cover the full cost for the year. When applying the differential cost the hospital also incurs a profit loss of $15,119, and a rate increase of $3,949.72 is required in order to cover the differential cost for the year.

After reviewing your income statement and seeing how you allocate costs, I created a segmented income statement (Ex-1). This statement allows us to see exactly how the costs are broken down according to your current system. According to your specifications, it

But at the same time one must keep in mind that how much it will cost follow about the consumption by each resident. As we see in this example, food service, supportive services are around 43% of the total costs, so we can maintain accounts for each resident for these services, at the same time, laundry services are only 3.74% of the total costs, and it is not advisable to maintain laundry costs for each resident, which may cost more.

This method of calculating costs could be beneficial or not depending on the organization and its size. In a healthcare setting, any healthcare institution is seen as delivering quality care and therefore most decisions regarding choice of the institution come down to the pricing. In order to compete for patients, the healthcare institution must bring its price down to the absolute margin. This will over time affect the institution badly as it will leave the institution without funds to replace the capital equipment. This can eventually lead to closing down of the financially weaker

In May 2006, Westmount Retirement Residence was having very low profitability. Its very simple pricing model essentially charged each resident the same price per month regardless of their needs. This was due to a change in the patients´ demands. In the past, patients´ demands were similar and therefore the company´s pricing and costing system was appropriate. But changes in the population and in the requirements of the residents caused that the pricing model remained out of date and the costing system inappropriate. One of the problems observed when analyzing the company´s situation was that due to the costing system used it was not possible to have a clear picture of how much each of the services offered were costing. Consequently, it was clearly very difficult being able to define a pricing system that will give the shareholders the desired profit. The first step was to design a new costing system adequate for the company

• This cost method does not provide the best system for JDCW’s cost allocation. By using only three overhead rates the present system grossly undermines the true production costs since other activities of the production process are not acknowledged.