Question

The Housekeeping Services department of Ruger Clinic, a multispecialty practice in Toledo, Ohio, had $100,000 indirect costs during 2007. These costs must be allocated to Ruger’s three revenue-producing patient services departments using the direct method.Two cost drivers are under consideration: patient services revenue and hours of housekeeping services used. The patient services department sgenerated $5millionin totalrevenues during 2007, and to support these clinical activities, they used 5,000 hours of housekeeping services.

a.What is thevalue of the cost pool?

b.What is the allocation rate if: •patient services revenue is used as the cost driver? •hours of housekeeping services isused as the cost driver?

Answer 1

Answer:

a. $100,000

b. $0.02 per patient services and $20 per housekeeping services hours

Explanation:

a. The value of the cost pool is $100,000 indirect cost only

b. The allocation rate

In the first case, it would be

= Value of the cost pool ÷ patient services revenue

= $100,000 ÷ $5,000,000

= $0.02 per patient services

In the first case, it would be

= Value of the cost pool ÷ housekeeping services hours

= $100,000 ÷ $5,000

= $20 per housekeeping services hours