## UNDERSTANDING HEALTHCARE FINANCIAL MANAGEMENT

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## Chapter 6 UNDERSTANDING HEALTHCARE FINANCIAL MANAGEMENT, 6th ed

### UNDERSTANDING HEALTHCARE FINANCIAL MANAGEMENT

Problem 6.7 – Direct Cost Allocation Method

St. Luke’s Hospital has three support departments and four patient services departments. The direct costs to each of the support departments are as follows:

Patient Services Departments

Department Direct Support Department Costs Patient Services Revenue Space (square feet) Number of Full-Time Equivalent Employees Salary Dollars Allocation Rate Routine Care Intensive Care Obstetrics Services Other Services Total

Support:

• General Administration \$4,000,000 8,000 15 \$2,500,000
• Maintenance \$5,000,000 10,000 75 3,500,000
• Employee Benefit \$4,000,000 7,000 50 3,000,000
• Total \$13,000,000 25,000 140 \$9,000,000
• Patient Services:
• Routine Care \$40,000,000 500,000 700 \$18,000,000
• Intensive Care 7,000,000 45,000 200 6,000,000
• Obstetrics Services 4,000,000 35,000 150 4,000,000
• Other Services 12,000,000 200,000 400 8,000,000
• Total \$63,000,000 780,000 1,450 \$36,000,000
• Grand Total \$63,000,000 805,000 1,590 \$45,000,000

Assume that the hospital uses the direct method for cost allocation. Furthermore, the cost driver for general administration is patient services revenue, the cost driver for maintenance is space utilization, and the cost driver for employee benefits is the number of full-time equivalent employees.

a. What are the appropriate allocation rates?

General Administration \$- per dollar of patient services revenue

Maintenance \$- per square foot

Financial Services \$- per full-time equivalent employees

b. Allocate the hospital’s overhead costs to the patient services departments.

### Chapter 6 UNDERSTANDING HEALTHCARE FINANCIAL MANAGEMENT, 6th ed

Problem 6.7 – Direct Cost Allocation Method

St. Luke’s Hospital has three support departments and four patient services departments. The direct costs to each of the support departments are as follows:

Patient Services Departments

Department Direct Support Department Costs Patient Services Revenue Space (square feet) Number of Full-Time Equivalent Employees Salary Dollars Allocation Rate Routine Care Intensive Care Obstetrics Services Other Services Total

Support:

• General Administration \$4,000,000 8,000 15 \$2,500,000
• Maintenance \$5,000,000 10,000 75 3,500,000
• Employee Benefit \$4,000,000 7,000 50 3,000,000
• Total \$13,000,000 25,000 140 \$9,000,000

Patient Services:

• Routine Care \$40,000,000 500,000 700 \$18,000,000
• Intensive Care 7,000,000 45,000 200 6,000,000
• Obstetrics Services 4,000,000 35,000 150 4,000,000
• Other Services 12,000,000 200,000 400 8,000,000
• Total \$63,000,000 780,000 1,450 \$36,000,000
• Grand Total \$63,000,000 805,000 1,590 \$45,000,000

Assume that the hospital uses the Step-down method for cost allocation, with patient service revenue as the cost driver for general administration, space as the cost driver for Maintenance, and salary dollars as the cost driver for employee benefits UNDERSTANDING HEALTHCARE FINANCIAL MANAGEMENT.

Assume also that the employee benefits department provides most services to other support departments, followed closely by general administration. The maintenance department provides the least services to the other support departments.UNDERSTANDING HEALTHCARE FINANCIAL MANAGEMENT

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a. What are the appropriate allocation rates?

Initial Allocation of EMPLOYEE BENEFIT

Cost pool

Cost Driver (salaries)

Allocation Rate per dollar of salaries

Allocation to MAINTENANCE

Cost pool

Employee Benefit Allocation

Total Cost Pool

Cost Driver (patient service revenue)

Allocation Rate per dollar of patient service revenue

Allocation to MAITENANCE

Subsequent Allocation of MAINTENANCE

Cost pool

Employee Benefit Allocation