Cost Allocation Exercise - Use the Direct Method Approach
Direct 1
| Cost Allocation Exercise | ||||||
| Use the Direct Method Approach | ||||||
| Projected Revenues by patient services department | Amount | |||||
| Routine care | $ 24,000,000 | |||||
| Laboratory | $ 15,000,000 | |||||
| Radiology | $ 14,000,000 | |||||
| Total Revenues | $ 53,000,000 | |||||
| Projected Costs for all departments: | ||||||
| Patient Services Departments (Direct Cost) | ||||||
| Routine care | $ 18,000,000 | |||||
| Laboratory | $ 8,000,000 | |||||
| Radiology | $ 7,000,000 | |||||
| Total Costs | $ 33,000,000 | |||||
| Support Services Department (Overhead Costs) | ||||||
| Financial Services | $ 3,000,000 | |||||
| Facilities | $ 5,600,000 | |||||
| Housekeeping | $ 3,000,000 | |||||
| Administration | $ 4,000,000 | |||||
| Human Resources | $ 2,400,000 | |||||
| Totals Costs | $ 18,000,000 | |||||
| Total Costs of both patient and support services | $ 51,000,000 | |||||
| Projected Profit | $ 2,000,000 |
Direct Cost drivers
| Key Information | ||||||||||
| Cost Drivers | Unit Measure | |||||||||
| Financial Services | Patient Services Revenue | |||||||||
| Facilities | Square Footage | |||||||||
| Housekeeping | Labor Hours | |||||||||
| Administration | Salary Dollars | |||||||||
| Personnel | Salary Dollars | |||||||||
| Patient Services | Square Ft | Housekeeping | Salary Dollars | |||||||
| Revenue | Labor Hours | |||||||||
| Routine care | $ 24,000,000 | 185,000 | 72,000 | $ 12,000,000 | ||||||
| Laboratory | $ 15,000,000 | 25,000 | 4,200 | $ 3,000,000 | ||||||
| Radiology | $ 14,000,000 | 55,000 | 8,000 | $ 3,500,000 | ||||||
| Total | $ 53,000,000 | 265,000 | 84,200 | $ 18,500,000 | ||||||
| COMPLETE THE TABLE (Need to calculate allocation rate) | ||||||||||
| Overhead Allocation Rates | ||||||||||
| Cost Pool | Cost Driver | Total utilization | Allocation Rate | |||||||
| Financial Services | $ 3,000,000 | Patient Services Revenue | $ 53,000,000 | 0.0566 | ||||||
| Facilities | $ 5,600,000 | Square Footage | 265,000 | 21.1321 | ||||||
| Housekeeping | $ 3,000,000 | Labor Hours | 84,200 | 35.6295 | ||||||
| Administration | $ 4,000,000 | Salary Dollars | $ 18,500,000 | 0.2162 | ||||||
| Human Resources | $ 2,400,000 | Salary Dollars | $ 18,500,000 | 0.1297 | ||||||
| Complere the Allocation Rate for each driver | ||||||||||
| Please provide your ideas on other data points not listed in row 12 of this spreadsheet that could be used as cost drivers for each of the non-revenue generating departments listed. | ||||||||||
| List 2 for financial services, 1 for facilities, 1 for housekeeping, 2 for administration and 1 for HR. |
Final Allocations
| Question 18 | |||||||||||||||||
| COMPLETE TABLE (All bolded areas) 3 points | |||||||||||||||||
| Patient Services Department | |||||||||||||||||
| Support Department | Routine Care | Laboratory | Radiology | Totals Allocated | |||||||||||||
| Financial Services | 24,000,000 | x | 0.566 | = | $13,584,000 | 15,000,000 | x | 0.566 | = | $8,490,000 | 14,000,000 | x | 0.566 | = | $7,924,000 | $29,998,000 | |
| Facilities | 185,000 | x | 21.132 | = | $3,909,420 | 25,000 | x | 21.132 | = | $528,300 | 55,000 | x | 21.132 | = | $1,162,260 | $5,599,980 | |
| Housekeeping | 72,000 | x | 35.629 | = | $2,565,288 | 4,200 | x | 35.629 | = | $149,641.80 | 8,000 | x | 35.629 | = | $285,032 | $2,999,962 | |
| Administration | 12,000,000 | x | 0.216 | = | $2,592,000 | 3,000,000 | x | 0.216 | = | $648,000 | 3,500,000 | x | 0.216 | = | $756,000 | $3,996,000 | |
| Human Resources | 12,000,000 | x | 0.13 | = | $1,560,000 | 3,000,000 | x | 0.13 | = | $390,000 | 3,500,000 | x | 0.13 | = | $455,000 | $2,405,000 | |
| Total Indirect Costs | $24,210,708 | $10,205,942 | $10,582,292 | ||||||||||||||
| Direct cost | $18,000,000 | $8,000,000 | $7,000,000 | ||||||||||||||
| Total cost | $42,210,708 | $18,205,942 | $17,582,292 | ||||||||||||||
| What is the resulting profitability of each Department and the organization as a whole? |
Service Line Deletion
| Service Line Deletion | ||||||||
| Assume each Departments individual Contribution Margins have been relative stable for the last 3 years at the levels noted below | ||||||||
| Sports Medicine | Radiology | Orthopedics | Cardiology | OBGYN | Service | |||
| Description | Total | |||||||
| in thousands $ | ||||||||
| Revenue | ||||||||
| Scranton | $ 2,000 | $ 12,000 | $ 10,000 | $ 12,000 | $ 5,000 | $ 41,000 | ||
| Wilkes Barre | 3,000 | 15,000 | 12,000 | 14,000 | 6,000 | 50,000 | ||
| Total Revenue | $ 5,000 | $ 27,000 | $ 22,000 | $ 26,000 | $ 11,000 | $ 91,000 | ||
| Variable Costs | ||||||||
| Variable Expense Labor | $ 4,500 | $ 10,000 | $ 10,000 | $ 12,000 | $ 7,000 | $ 43,500 | ||
| Disposable Equipment | 750 | 1,000 | 1,500 | 2,000 | 1,000 | 6,250 | ||
| Disposable Supplies | 750 | 2,000 | 3,000 | 4,000 | 3,000 | 12,750 | ||
| Total Variable Cost | $ 6,000 | $ 13,000 | $ 14,500 | $ 18,000 | $ 11,000 | $ 62,500 | ||
| Contribution Margin | $ (1,000) | $ 14,000 | $ 7,500 | $ 8,000 | $ - 0 | $ 28,500 | ||
| Departmental Fixed Cost | $ 450 | $ 10,000 | $ 5,000 | $ 4,000 | $ 450 | $ 19,900 | ||
| Allocated Overhead Cost | $ 275 | $ 1,484 | $ 1,209 | $ 1,429 | $ 604 | $ 5,000 | ||
| Net Income/Loss | $ (1,725) | $ 2,516 | $ 1,291 | $ 2,571 | $ (1,054) | $ 3,600 | ||
| 6,250 | ||||||||
| 1) Assuming fixed costs (in total) have also remained constant for the last (3) year period, decide on which service(s) you would delete (if any) to increase profit margin (net income). Thoroughly Explain your answer. | ||||||||
| 2) Based on your determination distribute Allocated Overhead based on each remaining departments % of total remaining revenue and eliminated departments Fixed cost evenly to each remaining department. | ||||||||
| Create a new Profit and Loss table for your results. | ||||||||
| 3) What other critical review needs to be considered before deleting a service line even though the contribution margin may be negative | ||||||||
| - 0 | ||||||||
| - 0 |