Cost Allocation Problems

Problem 1:

The laboratory services department for Swank Medical Systems has $300,000 in direct costs during 2012. These costs must be allocated to Swank’s three revenue producing patient services departments using the direct method. Two cost drivers are under consideration; patient services revenue and hours of laboratory services used. The patient services departments generated $6 million in total revenues in 2012, and to support these clinical activities, they used 6,000 hours of laboratory services.

What is the value of the cost pool? (10 points) $ 300,000

What is the allocation rate if Patient services revenue is used as the cost driver? (10 points) $300,000 / 6,000,000 = .05 Hours of laboratory services is used as the cost driver? (10 points) 300,000/6,000 = 50

Problem 2:

Refer to Problem 1. Assume that the three patient services departments are adult services, pediatric services, and other services. The patient services revenue and hours of laboratory services for each department are

Department | Revenue | Laboratory Hours | Adult Services | $3,000,000 | 1,500 | Pediatric Services | 1,500,000 | 3,000 | Other Services | 1,500,000 | 1,500 | Total | $6,000,000 | 6,000 |

a. What is the dollar allocation to each patient services department if patient services revenue is used as the cost driver? (10 points) 3,000,000 x .05= Adult service 150,000 1,500,000 x .05= Pediatric Services 75,000 1,500,000 x .05= Other Services 75,000 b. What is the dollar allocation to each patient services department if hours of laboratory services are used as the cost driver? (10 points) 1,500x 50 = Adult Service 75,000 3,000x50 =Pediatric service 150,000 1,500x 50 Other services 75,000 c. What is the difference in the allocation to each department between the two