Cost Allocation Assignment

Kaneilia Williams

Accounting in a Health Care Environment ACC/HC 561

April 23, 2012

Ruth E. Brown

Academic and Western Hospitals

Academic Hospital and Western Hospital share services as a result of a merger about a year ago. There is a parent organization that owns both hospitals and allows each to operate individual as its own profit center. Academic Hospital now handles all laboratory services for both hospitals and Western Hospital handles maternity services for both. Recently, an issue with the charges for amniocentesis arose because Western Hospital demanded a reduction in the price for laboratory services. This price reduction is requested because Western Hospital found an outside laboratory that will provide the same services for $375 instead of $400. The hospitals formed a joint committee address the issue. The cost allocation methods by both hospitals will be reviewed. The committee will decide how the cost centers were determined. The differences between fixed and variable costing will also be displayed.

Cost Allocation Methods

The cost allocation process involves transferring costs from area or department and allocates them to another area or department. “The goal of cost allocation is to associate costs as closely as possible with the patients who cause them to be incurred” (Finkler, Ward, and Baker, 2007). The main two types of cost allocation are indirect costs and allocation from one department to another. Indirect costs include those costs within the department that are transferred to other cost centers. In the scenario involving Academic Hospital and Western Hospital, the cost allocation methods used are allocation from one department to another. The transfer prices between both hospitals for the full charges, the variable costs, the market price, and the negotiated price