Question

2. Harborview Hospital has two patient services departments (Routine Care and Intensive Care) and two support departments (Maintenance and Employee Benefits). FTE Employees 75 Department Maintenance Employee Benefits Routine Care Intensive Care Direct Costs ($) | 5,000,000 4,000,000 2,000,000 3,000,000 Space (ft) 10,000 7,000 55,000 45,000 50 700 D 300 Assume that Harborview uses the direct method for cost allocation. The cost driver for maintenance is space utilization, and the cost driver for employee benefits is the number of full-time equivalent (FTE) employees. For only the Routine Care department: a. Calculate the allocated amount of indirect costs for Maintenance and for Employee Benefits. b. Calculate total indirect costs and total costs.

Answer 1

The direct method of cost allocation:

This method ignores inter serviceability of both the support departments i.e. maintenance and employee benefits so total cost of both these departments will be directly allocated to routine care and intensive care departments using the given cost drivers. So, cost drivers for both support departments will be ignored during allocation.

a)Calculations for cost allocation of maintenance and employee benefits to routine care department:

1.Maintenance department cost to routine care department

Using space utilization as a cost driver

And using the ratio of space utilized by routine care to intensive care department =55000:45000, Total =100000

Total cost of maintenancex space utilisation by routine care department Maintenance department cost to Routine care department = Total space utilisation by routine care and intensive care department 5000000 x 55000 Maintenance department cost to Routine care department = 100000 Maintenance department cost to Routine care department = 27,50,000

2.Employee benefit department cost to routine care department:

Using the number of FTE employees as a cost driver

And using the ratio of FTE Employees by routine care to intensive care department =700:300, Total =1000

b) calculation for total indirect and total costs for routine care department:

Total cost of employee benifit department Number of FTE employees used by routine care department Employee benifit cost to Routine care department = Total number of FTE employees used by routine care and intensive care department 4000000 x 700 Employee benifit cost to Routine care department = 1000 Employee benifit cost to Routine care department = 28,00,000