This data will be used for the following three questions The Maintenance Departm
ID: 2710441 • Letter: T
Question
This data will be used for the following three questions
The Maintenance Department of Sun Valley Orthopaedics & Sports Clinic had $300,000 in direct costs last year. These costs must be allocated to the clinic’s three patient services departments using the direct allocation method. Two cost drivers are under consideration: patient services revenue and labor hours (which includes housekeeping and routine maintenance). Assume the following about the profit centers:
Department
Revenue
Maintenance Hours
General Orthopaedics
$5,000,000
3500
Physical Therapy
$3,000,000
5000
Other Services
$1,000,000
1500
Total
$9,000,000
10,000
34.
Answer all parts of the question and please label your answers clearly.
a What is the Cost Pool?(2 points)
b What is the allocation rate for patient services revenue? (2 points)
c What is the allocation rate for labor hours? (2 points)
Answer all parts of the question and please label your answers clearly.
d What is the dollar allocation to each profit center if patient services revenue is the cost driver?(3 points)
e What is the dollar allocation to each profit center if labor hours is the cost driver?(3 points)
f What is the mathematical difference in the allocation to each profit center between the two drivers?(3 points)
36.
Which of the two drivers is better? Why? (2 points)
This data will be used for the following three questions
The Maintenance Department of Sun Valley Orthopaedics & Sports Clinic had $300,000 in direct costs last year. These costs must be allocated to the clinic’s three patient services departments using the direct allocation method. Two cost drivers are under consideration: patient services revenue and labor hours (which includes housekeeping and routine maintenance). Assume the following about the profit centers:
Department
Revenue
Maintenance Hours
General Orthopaedics
$5,000,000
3500
Physical Therapy
$3,000,000
5000
Other Services
$1,000,000
1500
Total
$9,000,000
10,000
Explanation / Answer
a. Total cost of $300,000 is allocated among various departments using Maintenance hours cost pool.
b. Allocation rate for patient services revenue = Total Costs / Total Revenue = 300,000 / 9,000,000 = 0.033
So allocation rate would be $0.033 per $1 of revenue earned
c. Allocation rate for labor hours revenue = Total Costs / Total labor hours = 300,000 / 10,000 = 30
So allocation rate would be $30 per 1 maintenance hour
d. Dollar allocation using patient services revenue is calculated in the below table
Department Revenue Allocation Rate Allocated Cost General Orthopaedics 5,000,000 0.0333 166,500 Physical Therapy 3,000,000 0.0333 99,900 Other Services 1,000,000 0.0333 33,300