Chapter 7, Problem 26E

To determine

For each given scenario, mention that the defendant (NCI) or the plaintiff (DHFS) will be the valid position based on the understanding of cost allocation.

• DHFS alleges that NCI charged specific milk, condiments, and paper products to the nursing home, without following the usual 60% (nursing home) and 40% (retirement home) sharing for food costs. NCI asserts that these items are used in the nursing home to counteract the greater danger of spread of disease in the nursing home. DHFS claims that NCI’s documentation to support charging these costs directly to the nursing home is inadequate.
• DHFS alleges that nourishments (liquid supplements, cookies, and some puree foods) that are consumed by nursing home residents at bedtime for their special health needs are akin to “seconds” at meals and should be allocated to both the nursing home and the retirement home.
• Three kitchen employees not involved in meal preparation are involved in service to both the nursing home and the retirement home; NCI asks the three employees to keep track of how much time they spend on the nursing home versus the retirement home. These time reports are then sent to management and are used as a basis for allocating the cost of the employees to the two homes. DHFS alleges that the practice is not sufficiently accurate and relies largely on unsupported, self reported information.
• NCI allocates utility costs to the two homes using an industrial engineering study performed by the power company on five days in June four years ago. DHFS disputes that this allocation base is valid and says that NCI must use a square footage base rate.
• NCI argues that because it competes on cost leadership in both the nursing home and retirement home businesses, the cost allocations must be fair for strategic reasons as well as to satisfy DHFS requirements.