Cost Allocation Problem The housekeeping services department of Ruger Clinic, amultispecialty practice, had $100,000 in direct costs in 2020. 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 departments generated $5 million in total revenues during 2020, and to supportthese clinical activities, they used 5,000 hours of housekeeping services. What is the value of the cost pool? What is the allocation ratio if patient services revenue is used as the cost driver? hours of housekeeping services is used as the cost driver? Assume that the three patient services departments are adult services, pediatric services, and other services. The patient services revenue and hours of housekeeping services for each department are as follows: Department Revenue Housekeeping Hours Adult services $3,000,000 1,500 Pediatric services 1,500,000 3,000 Other services 500,000 500 Total $5,000,000 5,000 Required: What is the difference in the allocation to each department between the two drivers? Which of the two drivers is better? Why?

Practical Management Science

6th Edition

ISBN:9781337406659

Author:WINSTON, Wayne L.

Publisher:WINSTON, Wayne L.

Chapter2: Introduction To Spreadsheet Modeling

Section: Chapter Questions

Problem 20P: Julie James is opening a lemonade stand. She believes the fixed cost per week of running the stand...

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Cost Allocation Problem

The housekeeping services department of Ruger Clinic, amultispecialty practice, had $100,000 in direct costs in 2020. 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 departments generated $5 million in total revenues during 2020, and to supportthese clinical activities, they used 5,000 hours of housekeeping

services.

What is the value of the cost pool?
What is the allocation ratio if
1. patient services revenue is used as the cost driver?
2. hours of housekeeping services is used as the cost driver?