### Cost Allocation in Nursing and Retirement Homes**Introduction to Cost Allocation** Cost allocation often plays a crucial role in resolving conflicts, particularly in litigation that involves disputes over the allocation of costs to products or services. This is especially relevant when a company produces some products for a competitive market and others for government contracts on a cost-plus or reimbursement basis.**Case Study: Nursing Care Incorporated (NCI)**Nursing Care Incorporated, referred to as NCI, operates both a small nursing home and a retirement home. The following are key points about how NCI's cost structure functions:1. **Integrated Services:** - **Kitchen:** A single kitchen provides meals to both the nursing home and the retirement home. Labor costs and utilities of the kitchen are shared by both homes. - **Cleaning Service:** There is a centralized cleaning department that offers cleaning services to both homes and the kitchen.2. **Patient Focus:** - The nursing home caters specifically to indigent patients on Medicaid.3. **Reimbursement:** - The Department of Health and Family Services (DHFS) reimburses NCI based on Medicaid-approved costs. The rates for reimbursement are determined using cost information supplied by NCI.**Cost and Allocation Data**The relevant cost and allocation data for the most recent year are presented in the following tables:#### Annual Operating Costs- **Cleaning Department:** $144,000- **Central Kitchen:** $201,000#### Allocation Base| Allocation Base | Kitchen | Nursing Home | Retirement Home ||---------------------|---------|--------------|-----------------|| **Square feet of space** | 1,000 | 2,000 | 3,000 || **Number of residents** | - | 6 | 4 |**Requirements**1. **Direct Method Allocation** - The management of NCI currently assigns kitchen and cleaning department costs based on the number of residents in each home. - **Task:** Determine the amount of service department costs assigned to each home using the number of residents as the allocation base.2. **Step Method Allocation** - DHFS auditors suggest using the step method for allocation. This method would first distribute cleaning costs based on square footage and then allocate kitchen costs based on the number of residents. - **Task:** Calculate the service department costs assigned to each home using this step-by-step allocation method.**Solution Summary Format**Below is

The operating department receives the expense of a department under the direct method. A service…

Cost allocation is often the centerpiece of conflict that is resolved in court cases. The litigation usually involves the dispute over how costs are allocated to a product or product line that is of interest to the plaintiff. This is particularly an issue when a company produces some products or services for a price-competitive market while other products or services are produced for a governmental unit on a cost-plus or reimbursement basis. Nursing Care Incorporated, or NCI, operates both a small nursing home and a retirement home. There is a single kitchen used to provide meals to both the nursing home and retirement home, meaning labor costs and utilities costs of the kitchen are shared by the two homes. There is also a centralized cleaning department that provides the cleaning services for both homes as well as the kitchen. The nursing home serves only indigent patients who are on Medicaid. The state Department of Health and Family Services (DHFS) reimburses NCI at Medicaid-approved cost reimbursement rates. The Medicaid reimbursement rates are based on cost information supplied by NCI. The relevant cost and allocation data for the most recent year appear in the following table. Annual Operating Cost $ 144,000 $ 201,000 Cleaning department Central kitchen Allocation Base Square feet of space Number of residents. Kitchen 1,000 Nursing Home 2,000 6 Retirement Home 3,000 4 Required: 1. Management of NCI currently allocates the kitchen and cleaning department costs based on the number of residents in each home. Determine the amount of service department costs assigned to each of the homes using this allocation base. 2. DHFS auditors believe the step method of allocation should be used by first assigning cleaning costs based on square feet and then kitchen costs based on number of residents. Determine the amount of service department costs assigned to each of the homes using

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q