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Cost allocation. Use the information in Exhibit 12.11 to answer these questions. a. Louis Clark, the new administrator for the surgical clinic, was trying to figure out how to allocate his indirect expenses. His staff were complaining that the current method of taking a percentage of revenues was unfair. He decided to try to allocate utilities expense based on square footage for each department, to allocate adminis- tration expense based on direct costs, and to allocate laboratory expense based on tests. What would the results be? b. Carol West, the nurse manager of the cystoscopy suite, was given approval to add more space to her current area by converting 500 square feet of administrative space into another cystoscopy bay. What will her new fully allocated expenses be? (Assume that there are no new additional costs incurred by adding the 500 square feet.)

Cost allocation. Use the information in Exhibit 12.11 to answer these questions. a. Louis Clark, the new administrator for the surgical clinic, was trying to figure out how to allocate his indirect expenses. His staff were complaining that the current method of taking a percentage of revenues was unfair. He decided to try to allocate utilities expense based on square footage for each department, to allocate adminis- tration expense based on direct costs, and to allocate laboratory expense based on tests. What would the results be? b. Carol West, the nurse manager of the cystoscopy suite, was given approval to add more space to her current area by converting 500 square feet of administrative space into another cystoscopy bay. What will her new fully allocated expenses be? (Assume that there are no new additional costs incurred by adding the 500 square feet.)

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
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Need help answering question 11 regarding cost allocation

CHAPTER 12 PROVIDER CoST-FINDING METHODS 574 EXHIBIT 12.11 BASIC STATISTICS FOR COST ALLOCATION IN A SURGERY CLINIC, FOR PROBLEM 11 Square Feet Dept. Costs Lab Tests Utilities $400,000 Administration 4,000 $700,000 Laboratory 2,000 $750,000 Day-op suite 4,000 $2,500,000 6,000 Cystoscopy Endoscopy 2,000 $575,000 2,000 1,000 $300,000 1,500 Total 13,000 $5,225,000 9,500 c. Bobbie Jones, the manager of the endoscopy suite, is concerned about adding more space. She contends that if the cystoscopy and endoscopy units were combined, fewer staff would be needed, and direct costs could be reduced by $50,000 ($25,000 in each unit). She also feels that the day-op area is underutilized, and that 500 square feet could be used by a combined unit when excess capacity was needed. Assuming that the 500 square feet were to be allocated equally between the endoscopy and cystoscopy suites, in addition to the renovations as described in part b, what would the total allocated costs for each of these two services be under this scenario? 12. Cost allocation. Use the information in Exhibit 12.12 to answer these questions. a. Dick Clark, the new administrator for the surgical clinic, was trying to figure out how to allocate his indirect expenses. He decided to try to allocate utilities based on square footage of each department, to allocate administration based on direct costs, and to allocate laboratory based on tests. How would indirect costs be distributed as a result? b. Joe Ryan, the director of laboratories, was given approval to add 250 square feet of space to the lab by expanding into the day-op suite, which lost the space. What will his new fully allocated expenses be? (Assume that there are no new additional costs incurred by adding the 250 square feet.) c. Mary Jones, the manager of the endoscopy suite, is concerned about adding more space. She contends that if the cystoscopy and endoscopy units were combined,
Transcribed Image Text:CHAPTER 12 PROVIDER CoST-FINDING METHODS 574 EXHIBIT 12.11 BASIC STATISTICS FOR COST ALLOCATION IN A SURGERY CLINIC, FOR PROBLEM 11 Square Feet Dept. Costs Lab Tests Utilities $400,000 Administration 4,000 $700,000 Laboratory 2,000 $750,000 Day-op suite 4,000 $2,500,000 6,000 Cystoscopy Endoscopy 2,000 $575,000 2,000 1,000 $300,000 1,500 Total 13,000 $5,225,000 9,500 c. Bobbie Jones, the manager of the endoscopy suite, is concerned about adding more space. She contends that if the cystoscopy and endoscopy units were combined, fewer staff would be needed, and direct costs could be reduced by $50,000 ($25,000 in each unit). She also feels that the day-op area is underutilized, and that 500 square feet could be used by a combined unit when excess capacity was needed. Assuming that the 500 square feet were to be allocated equally between the endoscopy and cystoscopy suites, in addition to the renovations as described in part b, what would the total allocated costs for each of these two services be under this scenario? 12. Cost allocation. Use the information in Exhibit 12.12 to answer these questions. a. Dick Clark, the new administrator for the surgical clinic, was trying to figure out how to allocate his indirect expenses. He decided to try to allocate utilities based on square footage of each department, to allocate administration based on direct costs, and to allocate laboratory based on tests. How would indirect costs be distributed as a result? b. Joe Ryan, the director of laboratories, was given approval to add 250 square feet of space to the lab by expanding into the day-op suite, which lost the space. What will his new fully allocated expenses be? (Assume that there are no new additional costs incurred by adding the 250 square feet.) c. Mary Jones, the manager of the endoscopy suite, is concerned about adding more space. She contends that if the cystoscopy and endoscopy units were combined,
REVIEW QUESTIONS AND PROBLEMS 573 5. Cost allocation and cost drivers. What is the relationship between the concept of the cost allocation basis, used in the step-down method, and the concept of the cost driver, used in activity-based costing (ABC)? 6. Fully allocated costs. What is the difference between a cost object's direct cost and its fully allocated cost? Give an example. 7. Step-down method. Identify and discuss four points that must be considered when using the step-down method of cost allocation. 8. ABC and step-down methods. What are the advantages and disadvantages of ABC rela- tive to the step-down method of cost allocation? 9. Activity-based costing. Referring to Exhibit 12.10, suppose that instead of 2,000, 5,000, and 3,000 visits for an initial, regular, and intensive visit, respectively, the number of visits was 3,000, 5,000, and 2,000. Assume that the costs associated with intake, new visits, medical records, and billing do not change in number or distribution. a. Would there be a change in the overhead cost per visit of an initial visit using either the conventional or ABC methods? b. Would there be a change in the total overhead cost of initial visits using either the conventional or ABC methods? 10. Activity-based costing. Referring to Exhibit 12.10, suppose that instead of 2,000, 5,000, and 3,000 visits for an initial, regular, and intensive visit, respectively, the number of visits was 2,500, 6,000, and 1,500. Assume that the costs associated with intake, new visits, medical records, and billing do not change in number or distribution. a. Would there be a change in the overhead cost per visit of an initial visit using either the conventional or ABC methods? b. Would there be a change in the total overhead cost of initial visits using either the conventional or ABC methods? 11. Cost allocation. Use the information in Exhibit 12.11 to answer these questions. a. Louis Clark, the new administrator for the surgical clinic, was trying to figure out how to allocate his indirect expenses. His staff were complaining that the current method of taking a percentage of revenues was unfair. He decided to try to allocate utilities expense based on square footage for each department, to allocate adminis- tration expense based on direct costs, and to allocate laboratory expense based on tests. What would the results be? b. Carol West, the nurse manager of the cystoscopy suite, was given approval to add more space to her current area by converting 5s00 square feet of administrative space into another cystoscopy bay. What will her new fully allocated expenses be? (Assume that there are no new additional costs incurred by adding the 500 square feet.)
Transcribed Image Text:REVIEW QUESTIONS AND PROBLEMS 573 5. Cost allocation and cost drivers. What is the relationship between the concept of the cost allocation basis, used in the step-down method, and the concept of the cost driver, used in activity-based costing (ABC)? 6. Fully allocated costs. What is the difference between a cost object's direct cost and its fully allocated cost? Give an example. 7. Step-down method. Identify and discuss four points that must be considered when using the step-down method of cost allocation. 8. ABC and step-down methods. What are the advantages and disadvantages of ABC rela- tive to the step-down method of cost allocation? 9. Activity-based costing. Referring to Exhibit 12.10, suppose that instead of 2,000, 5,000, and 3,000 visits for an initial, regular, and intensive visit, respectively, the number of visits was 3,000, 5,000, and 2,000. Assume that the costs associated with intake, new visits, medical records, and billing do not change in number or distribution. a. Would there be a change in the overhead cost per visit of an initial visit using either the conventional or ABC methods? b. Would there be a change in the total overhead cost of initial visits using either the conventional or ABC methods? 10. Activity-based costing. Referring to Exhibit 12.10, suppose that instead of 2,000, 5,000, and 3,000 visits for an initial, regular, and intensive visit, respectively, the number of visits was 2,500, 6,000, and 1,500. Assume that the costs associated with intake, new visits, medical records, and billing do not change in number or distribution. a. Would there be a change in the overhead cost per visit of an initial visit using either the conventional or ABC methods? b. Would there be a change in the total overhead cost of initial visits using either the conventional or ABC methods? 11. Cost allocation. Use the information in Exhibit 12.11 to answer these questions. a. Louis Clark, the new administrator for the surgical clinic, was trying to figure out how to allocate his indirect expenses. His staff were complaining that the current method of taking a percentage of revenues was unfair. He decided to try to allocate utilities expense based on square footage for each department, to allocate adminis- tration expense based on direct costs, and to allocate laboratory expense based on tests. What would the results be? b. Carol West, the nurse manager of the cystoscopy suite, was given approval to add more space to her current area by converting 5s00 square feet of administrative space into another cystoscopy bay. What will her new fully allocated expenses be? (Assume that there are no new additional costs incurred by adding the 500 square feet.)
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