The housekeeping services department of Ruger Clinic, amultispecialty practice, had $100,000 in direct costs in 2020. These costs must be allocated to Ruger’s three revenue-producing patient services departments using the direct method. Two cost drivers are under consideration: patient services revenue and hours of housekeeping services used. The patient services departments generated $5 million in total revenues during 2020, and to supportthese clinical activities, they used 5,000 hours of housekeeping services. What is the value of the cost pool? What is the allocation ratio if patient services revenue is used as the cost driver? hours of housekeeping services is used as the cost driver?
Cost Allocation Problem
The housekeeping services department of Ruger Clinic, amultispecialty practice, had $100,000 in direct costs in 2020. These costs must be allocated to Ruger’s three revenue-producing patient services departments using the direct method. Two cost drivers are under consideration: patient services revenue and hours of housekeeping services used. The patient services departments generated $5 million in total revenues during 2020, and to supportthese clinical activities, they used 5,000 hours of housekeeping
services.
- What is the value of the cost pool?
- What is the allocation ratio if
- patient services revenue is used as the cost driver?
- hours of housekeeping services is used as the cost driver?
- Assume that the three patient services departments are adult services, pediatric services, and other services.
The patient services revenue and hours of housekeeping services for
each department are as follows:
Department Revenue Housekeeping Hours
Adult services $3,000,000 1,500
Pediatric services 1,500,000 3,000
Other services 500,000 500
Total $5,000,000 5,000
Required:
- What is the dollar allocation to each patient services department
if patient services revenue is used as the cost driver?
- What is the dollar allocation to each patient services department
if hours of housekeeping support is used as the cost driver?
- What is the difference in the allocation to each department
between the two drivers?
- Which of the two drivers is better? Why?
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