Question

The London Private Hospital has 3 patient services departments – Adult Medicine, Obstetrics and Paediatrics. It also has 3 patient support departments – administration, Facilities and Finance. The revenues of the three patient services departments are:

Adult medicine $12 million

Obstetrics $6 million

Paediatrics $2 million

The direct costs of all 6 departments are:

Adult medicine $6 million

Obstetrics $3.6 million

Paediatrics $1.2 million

Administration $1 million

Facilities $4.4 million

Finance $1.8 million

Direct costs of the support departments are allocated to patient services departments using the direct method on the basis of the % of services provided to the support departments to the patient service departments.

The table below gives the percentages of support provided by the support departments to both each other and the services departments. For example, 10% of admin’s services are provided to the finance department and 20% to obstetrics

	% of services provided by
service to provide	admin	facilities	finance
admin	0	5	5
facilities	10	0	5
finance	10	10	0
adult medicine	35	55	50
obstetrics	20	10	25
paediatrics	25	20	15
Total	100	100	100

Allocate the support overheads to the 3 patient service departments on the basis of the % of services provided.

b. Calculate the profit and loss position for each of the patient service departments and the hospital as a whole.

c. Should the hospital consider closing down any or all of the patient service departments to increase its profitability or reduce its losses? Explain why or why not.

Hint: All costs of the supporting units are to be allocated to cost objects.

Hint: Allocations rate depends solely on each cost object's cost driver and how much in total is allocated to cost objects

Hint: Allocation rates have a numerator and denominator component. The key is to adjust these based on information provided in the question.

Answer 1

Profit and loss position for each of the patient service departments and the hospital as a whole:

(Amount in million $)

Sr. No.	Particulars	Adult medicine	Obstetrics	Paediatrics	Total for hospital
1	Revenue	12	6	2	20
2	Direct Cost:	6	3.6	1.2	10.8
3	Support Overheads - directly allocable cost - Admin	0.35 (35% of 1)	0.2 (20% of 1)	0.25 (35% of 1)	0.8
4	Support Overheads - directly allocable cost - Facilities	2.42 (55% of 4.4)	0.44 (10% of 4.4)	0.88 (20% of 4.4)	3.74
5	Support Overheads - directly allocable cost - Finance	0.9 (50% of 1.8)	0.45 (25% of 1.8)	0.27 (15% of 1.8)	1.62
6	Inter support departmental cost				1.04
7	Net Profit	2.33	1.31	(0.6)	2

Support provided by the support departments to each other:

(Amount in million $)

Sr. No.	Particulars	Admin	Facilites	Finance
1	Administration		0.1 (10% of 1)	0.1 (10% of 1)
	Facilities	0.44 (10% of 4.4)		0.22 (5% of 4.4)
	Finance	0.09 (5% of 1.8)	0.09 (5% of 1.8)
	Inter departmental cost to be allocated to service departments	0.53	0.19	0.32
	Total	1.04

Hospital can consider closing Paediatrics department since it is incurring losses.