3 Assume that the hospital uses the direct method for cost allocation.

6.3 Assume that the hospital uses the direct method for cost allocation. Furthermore, the cost driver for general administration and financial services is patient services revenue, while the cost driver for facilities is space utilization. a. What are the appropriate allocation rates? b. Use an allocation table similar to Exhibit 6.7 to allocate the hospital’s overhead costs to the patient services departments. 6.4 Assume that the hospital users salary dollars as the cost driver for general administration, housekeeping labor hours as the cost driver for facilities, and patient services revenue as the cost driver for financial services. (The majority of the costs of the facilities department stem from the provision of housekeeping services.) a. What are the appropriate allocation rates? b. Use an allocation table similar to the one used for Problem 6.3 to allocate the hospital’s overhead costs to the patient services departments. c. Compare the dollar allocations with those obtained in Problem 6.3 Explain the differences. d. Which of the two cost driver schemes is better? Explain your answer. 6.5 Now assume that the hospital uses the step-down method for cost allocation, with salary dollar as the cost driver for general administration, housekeeping labor hours as the cost driver for facilities, and patient services revenue as the cost driver for financial services. Assume also that the general administration department provides the most services to other support departments, followed closely by the facilities department. The financial services department provides the least services to the other support departments. a. Use an allocation table to allocate the hospital’s overhead costs to the patient services departments. b. Compare the dollar allocations with those obtained in Problem 6.4 Explain the differences. c. Is the direct method or the stop-down method better for cost allocation within St. Benedict’s? Explain your answer.

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