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Cost Allocation Essay

1058 words - 5 pages

Methods of Allocating

Costs - Overview

1. Review the three Method of Allocating Costs.
- Direct Method
- Step Down Method
- Reciprocal Method
2. Discuss the strengths and weaknesses of each method
3. Winery Problem – platform for discussing Joint Cost
Allocations
4. Review remaining cost allocation problems.
5. Summarize and Review.

State College Community Hospital

State College Community Hospital has 2 Service Departments:
1. Maintenance
2. Food Services
The Hospital also has three patient care units:
1. General Medicine
2. OB
3. Surgery
Using the following information, we will allocate the costs of these 2
service departments to the 3 patient care units using the:
1. Direct Method
2. ...view middle of the document...

State College Community Hospital

Step-Down Method Maintenance First

Allocated
Maintenance
Costs
Food Services
Maintenance
Surgery
OB
General Medicine
Total

Allocated
Food Service
Costs

State College Community Hospital

How do we allocate costs using the Step-Down Method allocating
Maintenance First?
1. All Costs of the Maintenance Department’s to the four other
divisions in the firm.
2. Calculate Expected Utilization Rates
Department

Expected use

Food Services

1/9

Surgery

2/9

OB

3/9

General Medicine

Allocated Cost

3/9

3. Multiply Expected Utilization Rate and amount of cost to be allocated.

State College Community Hospital

4. Then take the cost of Food Services + the allocated cost of
Maintenance and allocate those costs to the patient care departments.
Food Services
Allocated Maintenance
Adjusted food service cost

3,000,000
888,888
3,888,888

Expected Use
Surgery

25%

OB

18.75%

General Medicine

56.25%

Total

100%

Allocated Cost

State College Community Hospital

Step-Down Method Food Service First

Allocated
Maintenance
Costs
Food Services
Maintenance
Surgery
OB
General Medicine
Total

Allocated
Food Service
Costs

State College Community Hospital

How do we allocate costs using the Step-Down Method allocating
Food Service First?
1. All Costs of the Food Service Department’s to the four other divisions
in the firm.
2. Calculate Expected Utilization Rates
Department

Expected use

Maintenance

1/17

Surgery

4/17

OB

3/17

General Medicine

Allocated Cost

9/17

3. Multiply Expected Utilization Rate and amount of cost to be allocated.

State College Community Hospital

4. Then take the cost of Maintenance + the allocated cost of Food
Services and allocate those costs to the patient care departments.
Maintenance
Allocated Food Service
Adjusted food service cost

8,000,000
176,470
8,176,470

Expected Use
Surgery

25%

OB

37.5%

General Medicine

37.5%

Total

100%

Allocated Cost

State College Community Hospital

Reciprocal Method:
1. Determine total cost to be allocated for each department.
M = 8,000,000 + .10(M) + .05(F)
F = 3,000,000 + .15(F) + .10(M)
Maintenance = $9,144,722

Food Service = $4,605,000

2. Assign Costs Based on utilization rates for each department

State College Community Hospital

Maintenance:

Expected Use

Allocated Cost

Surgery

20%

?

OB

30%

?

General Medicine 30%

?

Total

?

80%

Food Service:

Expected Use

Allocated Cost

Food +...

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