Cost Allocation in Health Care Cost allocation is often the centerpiece of conflict that is resolvedproduct line that is of interest to the plaintiff. This is particularly an issue when a company producesin court cases. The litigation usually involves the dispute over how costs are allocated to a predproduct line that is of interest to the plaintiff. This is particularly an issue when a company produosome products or services for a price-competitive market while other products or services areesduced for a governmental unit on a cost-plus or reimbursement basis.Nursing Care Inc., or NCI, operates both a small nursing home and retirement home. Thre isingle kitchen used to provide meals to both the nursing home and retirement home, meaning labcosts and utilities costs of the kitchen are shared by the two homes. There is also a centralized clesing department that provides the cleaning services for both homes as well as the kitchen. The nursinehome serves only indigent patients who are on Medicaid. The state Department of Health and FamilyServices (DHFS) reimburses NCI at Medicaid-approved cost reimbursement rates. The Medicaidreimbursement rates are based on cost information supplied by NCI. The relevant cost and allocationdata for the most recent year appear in the following table:Annual Operating CostCleaning department$ 90,000$120,000Central kitchenAllocation BaseKitchenNursing Home Retirement HomeSquare feet of space1,0002,0003,000Number of residents6.4Required1. Management of NCI currently allocates the kitchen and cleaning department costs based on thenumber of residents in each home. Determine the amount of service department costs assigned toeach of the homes using this allocation base. Round percentages to two decimal places in yourcalculations.2. DHFS auditors believe the step method of allocation should be used by first assigning cleaning costsbased on square feet and then kitchen costs based on number of residents. Determine the amount ofservice department costs assigned to each of the homes using this allocation method.3. Provide some comments as to why NCI might prefer its selected allocation method over the one sup-ported by DHFS. Are there ethical implications related to the decision?

The Allocation of costs as explained in the question is relevant in competitive markets

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. Round percentages to two decimal places in your calculations. 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 this allocation method. 3. Provide some comments as to why NCI might prefer its selected allocation method over the one sup- ported by DHFS. Are there ethical implications related to the decision?

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. Round percentages to two decimal places in your calculations. 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 this allocation method. 3. Provide some comments as to why NCI might prefer its selected allocation method over the one sup- ported by DHFS. Are there ethical implications related to the decision?

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Check image file for question Q1a. Allocate the service department costs to the two operating departments using the direct method. b.Allocate the service department cost to the two operating departments using ,I)the step-down method (Allocate administrative service first) . ii)the step down method (Allocoate Maintenance service first) c. Assuming you are the manager of the Daily Patient department.Discuss which method of cost allocation would you prefer.Justify your decision d.Mr Smith the financial controller of LabAid is convinced that the step-down method allocates more costs to the operating departments than the direct method.Do you agree with ,Mr Smith.Explain.
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Using the sequential method, Pone Hill Company allocates Janitorial Department costs based on square footage serviced. It allocates Cafeteria Department costs based on the number of employees served. It has determined to allocate Janitorial costs before Cafeteria costs. It has the following information about its two service departments and two production departments, Cutting and Assembly: Number of Employees 20 10 60 20 Costs Janitorial Department $450,000 Cafeteria Department 200,000 Cutting Department 1,500,000 Assembly Department 3,000,000 Square Feet 100 10,000 2,000 8,000 The percentage (proportional) usage of the Janitorial Department by the Cutting Department is Oa. 20% Ob. 9.9% Oc. 80% Od. 10%
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Jane’s Cookhouse is a popular restaurant located in a scenic setting. The owner of the restaurant has been trying to better understand costs at the restaurant and has hired a student intern to conduct an ABC study. The intern, in consultation with the owner, identified three major activities. The intern then completed the first-stage allocations of costs to the activity cost pools, using data from last month’s operations. The results appear below: Activity Cost Pool Activity Measure Total Cost Total Activity Serving a party of diners Number of parties served $ 16,585 5,350 parties Serving a diner Number of diners served $ 107,010 13,050 diners Serving a drink Number of drinks ordered $ 35,310 10,700 drinks The above costs include all of the costs of the restaurant except for organization-sustaining costs such as rent, property taxes, and top-management salaries. A group of diners who ask to sit at the same table are counted as a party. Some costs, such as the…
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Which one of the following options can be used when allocating cafeteria costs? Select one: a. Number of square feet b. Appraised value of square footage c. Number of direct labor hours d. Number of employees
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The types of costs: Direct fixed cost, contribution margin, Gross margin, step variable, Indirect fixed cost, variable cost and Initial investment.