P 8-3: rose hospital rose hospitalhas two service departments

P 8-3: Rose Hospital

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                Rose Hospitalhas two service departments (building services and food service), and three patient care units (intensive care, surgery, and general medicine).  Building services provides janitorial, maintenance, and engineering services as well as space (utilities, depreciation, insurance and taxes) to all departments and patient care units.  Food service provides meals to both patients and staff members.  It operates a cafeteria and serves meals to patients in their rooms.  Building service costs of $6 million are allocated based on square footage, and food service costs of $3 million are allocated based on number of meals served.  The following two tables summarize the annual costs of the two service departments and the utilzation of each service department by the other departments.

 

Annual Cost (Millions)

Building Services

$6

Food Service

$3

 

 

Total Overhead

$9

 

Utilization Patterns

 

Allocation

Base

Building Services

Food Services

Intensive Care

 

Surgery

General Medicine

 

TOTAL

 

 

 

 

 

 

 

 

Building Services

Sq. Footage

2500

15500

10000

20000

40000

88000

 

 

 

 

 

 

 

 

Food Service

Meals

12000

10000

3000

4000

98000

127000

 

                The following table summarizes the allocation of service e department costs using the step-down method with Food Service as the first service department to be allocated:

Step Down Method – (Food Service First)

 

Intensive Care

Surgery

General Medicine

Food Service

$0.09

$0.09

$2.52

Building Service

$0.88

$1.83

$3.59

 

 

 

 

Total

$0.97

$1.92

$6.11

 

Required:

1.)    Allocate the two service department costs to the three patient care units using the direct method of allocating service department costs.

2.)    Same as (1) except use the step-down allocation method with Building Services as the first service department allocated.

3.)    Write a short, nontechnical memo to management explain why the sum of the two service department costs allocated to each patient care unit in (2) differs from the sum of the costs computed using the step-down method starting with Food Service.